Understanding the Macroeconomic Effects of Natural Disasters

IMF Working Papers, February 21, 2025

Source details

Climate change is causing more frequent and devastating natural disasters.
The paper has two main goals:
- Examine the dynamic effects of natural disasters on the growth of output and its components.
- Assess the role of pre-existing country characteristics in mitigating the adverse impact of natural disasters.

Advanced economies (AEs):
- Government expenditure rises immediately in the same year of the natural disaster.
- The rise in government expenditure offsets the decline in private investment growth.
- As a result, output growth in AEs is not significantly affected by natural disasters.
Emerging markets and developing countries (EMDEs):
- The increase in government expenditure after a natural disaster is smaller than in AEs.
- The smaller fiscal response is unable to mitigate the contemporaneous negative effect on output growth.
- The contemporaneous decline in output growth mainly reflects:
- A fall in investment in non-small-island EMDEs.
- A fall in net exports in small-island EMDEs.
- Output recovery in the subsequent year does not fully offset the decline during the year of the disaster.

Small islands tend to experience more significant declines in output growth following a natural disaster.
Countries with limited pre-disaster fiscal space tend to experience more significant declines in output growth following a natural disaster.

Source: https://www.imf.org/en/publications/wp/issues/2025/02/21/understanding-the-macroeconomic-effects-of-natural-disasters-562165