Natural Disasters and Slow Recoveries: New Evidence from Chile

We study the macroeconomic responses of Chilean regions to extreme weather shocks —floods and wildfires— using local projections and novel administrative data. Our results show persistent GDP losses, temporary declines in consumption, and a delayed rebound in investment, accompanied by rising employment but falling wages and effective hours. These patterns contrast with U.S. county-level evidence on natural disasters, highlighting the role of disaster size, and institutional and financial factors in shaping recovery in emerging markets. We interpret the dynamics through four mechanisms: destruction of productive capital, tighter financial conditions that constrain rebuilding, reallocation of production, and household wealth losses that depress consumption while fueling lowwage reconstruction employment. Embedding these insights into a real business cycle framework with financial frictions, we show that financial constraints amplify disaster impacts and slow recovery. Our findings underscore the importance of targeted financial and reconstruction policies to prevent long-term economic scarring.