The Macroeconomic Returns of Investment in Resilience to Natural Disasters under Climate Change: A DSGE Approach

Emilio Fernández Corugedo, Andres Gonzalez and Alejandro Guerson

No 2023/138, IMF Working Papers from International Monetary Fund

Abstract: This paper presents a Markov switching dynamic stochastic general equilibrium model designed to evaluate the macroeconomic return of adaptation investment to natural disasters (NDs) and the impact of climate change. While the model follows the existing literature in assuming that NDs destroy a share of the public and private capital stocks and a government that can invest in adaptation at an additional cost, it adds several features that are key to the analysis, both in the near (transition) and long (steady state) terms. Those include incomplete markets, financial frictions with collateral constraints, foreign remittances, full menu of tax and government spending instruments, and endogenous climate risk premium. The model is calibrated to the case of Dominica. It finds that NDs have large and persistent negative effects on output and public finances. It also shows that adaptation investment has large returns in terms of private investment, employment, output and tax revenue in the long term, especially under climate change.

Keywords: natural disasters; climate change; DSGE; resilient capital; financial frictions; Dominica; climate adaptation policies; adaptation investment; investment producer; government spending instrument; endogenous climate risk premium; ND event; moment calibration summary; Consumption; Return on investment; Caribbean; Global (search for similar items in EconPapers)
Pages: 49
Date: 2023-06-30
New Economics Papers: this item is included in nep-dge and nep-env
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