On the GDP effects of severe physical hazards

Martin Bodenstein and Mikaël Scaramucci

European Economic Review, 2025, vol. 175, issue C

Abstract: We use local projection methods with instrumental variables to analyze a panel dataset that links monetary damages and geophysical hazard strength (which serve as our instruments), associated with a wide range of severe weather events. This approach allows us to understand the GDP impact of these events at the country level. The estimated impulse response functions indicate a persistent GDP decline lasting several years after an increase in disaster-related monetary damages. More severe disasters leave a disproportionately larger negative effect on the economy. For the top 10 percent of disasters, GDP remains approximately 2 percent lower in the medium term (5-7 years) and does not fully recover over the 10-year horizon of our analysis. When disaggregating by disaster type, we find similar results across categories, with storms emerging as the primary driver. High-income countries experience significantly smaller effects than middle- and low-income countries. Our findings are robust to alternative impact measures, such as disaster-related deaths, the number of people affected, or a simple disaster occurrence indicator.

Keywords: Climate-related risk; GDP growth; Natural hazards and disasters; Rare disasters; Vulnerability to climate impacts (search for similar items in EconPapers)
JEL-codes: E3 F44 Q54 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:175:y:2025:i:c:s0014292125000698

DOI: 10.1016/j.euroecorev.2025.105019

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