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Macroeconomic Outcomes in Disaster-Prone Countries

Alessandro Cantelmo (), Giovanni Melina () and Chris Papageorgiou

No 2019/217, IMF Working Papers from International Monetary Fund

Abstract: Using a dynamic stochastic general equilibrium model, we study the channels through which natural disaster shocks affect macroeconomic outcomes and welfare in disaster-prone countries. We solve the model using Taylor projection, a solution method that is shown to deal effectively with high-impact weather shocks calibrated in accordance to empirical evidence. We find large and persistent effects of weather shocks that significantly impact the income convergence path of disaster-prone countries. Relative to non-disaster-prone countries, on average, these shocks cause a welfare loss equivalent to a permanent fall in consumption of 1.6 percent. Welfare gains to countries that self-finance investments in resilient public infrastructure are found to be negligible, and international aid has to be sizable to achieve significant welfare gains. In addition, it is more cost-effective for donors to contribute to the financing of resilience before the realization of disasters, rather than disbursing aid after their realization.

Keywords: WP; depreciation rate; math display; natural disasters; climate change; DSGE; resilient capital; international aid; welfare loss; disaster-prone country; country group; net export; countries vis-à-vis; percentage terms; Consumption; Private investment; Pacific Islands; Global; Central Africa; Caribbean (search for similar items in EconPapers)
Pages: 52
Date: 2019-10-11
New Economics Papers: this item is included in nep-dge and nep-env
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Handle: RePEc:imf:imfwpa:2019/217