Macroeconomic Consequences of Natural Disasters: A Modeling Proposal and Application to Floods and Earthquakes in Turkey
Stéphane Hallegatte, Charl Jooste, Florent John Mcisaac
Abstract
Turkey is vulnerable to natural \n disasters that can generate substantial damages to public \n and private sector infrastructure capital. Earthquakes and \n floods are the most frequent hazards today, and flood risks \n are expected to increase with climate change. To ensure \n stability and growth and minimize the welfare impact of \n these disasters, these shocks need to be managed and \n accounted for in macro-fiscal and monetary policy. To \n support this process, the World Bank Macrostructural Model \n is adapted to assess the macroeconomic effects of natural \n (geophysical or climate-related) disasters. The \n macroeconomic model is extended on several fronts: (1) a \n distinction is made between infrastructure and \n non-infrastructure capital, with complementary or \n substitutability between the two categories; (2) the \n production function is adjusted to account for short-term \n complementarity across capital assets; (3) the \n reconstruction process is modeled in a way that accounts for \n post-disaster constraints, with distinct processes for the \n reconstruction of public and private assets. The results \n show that destroyed infrastructure capital makes the \n remaining non-infrastructure capital less productive, which \n means that disasters reduce the total stock of capital, but \n also its productivity. The welfare impact of a \n disaster—proxied by the discounted consumption loss—is found \n to increase non-linearly with direct asset losses. \n Macroeconomic responses reduce the welfare impact of minor \n disasters but magnify it when direct asset losses exceed the \n economy’s absorption capacity. The welfare impact also \n depends on the pre-existing economic situation, the ability \n of the economy to reallocate resources toward \n reconstruction, and the response of the monetary policy. \n Appropriate macro-fiscal and monetary policies offer \n cost-effective opportunities to mitigate the welfare impact \n of major disasters.