Analyzing the Short and Long-term Economic Impact of Natural Disasters at a Local Level: Evidence from Chile

One of the salient aspects of climate change is the increment of both the intensity and frequency of natural disasters. This paper addresses how these factors interplay at a local level, focusing on Chilean regions at a quarterly basis for the period 2009–2025. To analyze intensity, I rely on the local projections method and find that on average, a 1% shock in natural disasters’ intensity has an immediate negative effect in employment by 0.057%, and an immediate negative effect on the debt market, increasing the household debt by 0.123 p.p. Overall, my results suggest that a 1% shock in natural disasters’ intensity has an immediate positive effect in real GDP by 0.015%, and a significant long-term negative effect on GDP by 0.054%, potentially showing signs of hysteresis. On the other hand, to analyze natural disasters’ frequency, I rely on a local projections difference-in-differences (LP-DID) estimator and find that those Chilean regions that suffer a natural disaster are more likely to experience short-term decreases in employment and GDP by 0.005% and 0.003%, respectively. I rely on a panel VAR model to estimate the impact of natural disasters’ intensity as robustness checks, and find that my original conclusions hold: natural disasters have a short-term negative effect on employment at 0.005% and a long-term negative effect on growth at 0.170%.