Natural Disasters and Macroeconomic Performance

Abstract

Recent empirical research has shown that output and GDP per capita in the after-math of natural disasters are not necessarily lower than before the event. In many cases,both are not significantly affected and, surprisingly, sometimes they are found to respondpositively to natural disasters. Here, we propose a novel economic theory that explains theseobservations. Specifically, we show that GDP is driven above its pre-shock level when naturaldisasters destroy predominantly durable consumption goods (cars, furniture, etc.). Disastersdestroying mainly productive capital, in contrast, are predicted to reduce GDP. Insignificantresponses of GDP can be expected when disasters destroy both, durable goods and productivecapital. We extend the model by a residential housing sector and show that disasters may alsohave an insignificant impact on GDP when they destroy residential houses and durable goods.We show that disasters, irrespective of whether their impact on GDP is positive, negative, orinsignificant, entail considerable losses of aggregate welfare.