The Economic Footprint of Natural Disasters: Demand-side or supply-side forces?

Jorge Pozo and Youel Rojas

No 2025-012, Working Papers from Banco Central de Reserva del Perú

Abstract: This paper investigates how physical risks disrupt business cycles and hinder the role of monetary policy in stabilizing the economy. We look for evidence to determine whether the effects of natural disasters resemble demand-side shocks or supply-side shocks. We utilize data on natural disasters at both the country-quarter and country-year levels from various sources to ensure the robustness of our analysis. We find evidence that natural disasters act as supplyside shocks, exerting inflationary pressures while simultaneously contracting GDP growth and the output gap, which are persistent. This feature of natural disasters implies that monetary policy strategy becomes more challenging and uncertain following the occurrence of these events. However, these results are heterogeneous cross types of disasters, groups of countries, and the severity of the disaster. In low-income countries, the effects of natural disasters are more severe. In high-income countries the non-linear effects become more important.

Keywords: Natural disasters; supply shocks; monetary policy trade-off; inflation; GDP growth; output gap. (search for similar items in EconPapers)
JEL-codes: E32 E52 Q5 (search for similar items in EconPapers)
Date: 2025-12
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Persistent link: https://EconPapers.repec.org/RePEc:rbp:wpaper:2025-012

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