Macroeconomic Outcomes in Disaster-Prone Countries
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Summary:
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.
Series:
Working Paper No. 2019/217
Subject:
Climate change Consumption Environment National accounts Natural disasters Private investment Public debt
English
Publication Date:
October 11, 2019
ISBN/ISSN:
9781513515380/1018-5941
Stock No:
WPIEA2019217
Pages:
52
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