Modeling the macroeconomic consequences of natural disasters: Capital stock, recovery dynamics, and monetary policy
Stephane Hallegatte,
Charl Jooste and
Florent McIsaac
Economic Modelling, 2024, vol. 139, issue C
Abstract:
Natural disasters can cause substantial damage to public and private sector infrastructure capital, generating macroeconomic losses through complex channels. These shocks must be managed and accounted for with macrofiscal and monetary policy to minimize their welfare impacts. To support this process, we adapt the World Bank Macrostructural Model to capture key transmission channels of natural (geophysical or climate-related) disasters and their immediate aftermath. The macroeconomic model is extended on several fronts: (1) a distinction is made between infrastructure and noninfrastructure capital; (2) the production function is adjusted to account for short-term complementarity across capital assets; (3) the reconstruction process is modeled to consider postdisaster constraints, with distinct processes for the reconstruction of public and private assets. Destroyed infrastructure capital makes the remaining noninfrastructure capital less productive, which means that disasters reduce the total stock of capital and its marginal productivity. Upon applying the model to Türkiye data, the welfare impact of a disaster — proxied by the discounted consumption loss — is found to increase nonlinearly with direct asset losses. Macroeconomic responses reduce the welfare impact of minor disasters but magnify it when direct asset losses exceed the economy’s absorption capacity. The welfare impact also depends on the preexisting economic situation, the ability of the economy to reallocate resources toward reconstruction, and the response of monetary policy. Appropriate macrofiscal and monetary policies offer cost-effective opportunities to mitigate the welfare impact of major disasters.
Keywords: Climate; Earthquakes; Floods; Macrostructural model; Natural disasters (search for similar items in EconPapers)
JEL-codes: C10 C50 E52 Q54 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)
Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0264999324001433
Full text for ScienceDirect subscribers only
Related works:
Working Paper: Modeling the Macroeconomic Consequences of Natural Disasters: Capital Stock, Recovery Dynamics, and Monetary Policy (2022) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:139:y:2024:i:c:s0264999324001433
DOI: 10.1016/j.econmod.2024.106787
Access Statistics for this article
Economic Modelling is currently edited by S. Hall and P. Pauly
More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Catherine Liu ().