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Macroeconomic and Financial Effects of Natural Disasters

Author

Listed:
  • Sandra Eickmeier
  • Josefine Quast
  • Yves Schuler

Abstract

We examine how natural disasters impact the US economy and financial markets using monthly data since 2000. Our analysis reveals large sustained adverse effects of disasters on overall economic activity, with significant implications across various sectors including labor, production, consumption, investment, and housing. Our findings suggest that these effects stem from heightened financial risk, increased uncertainty, declining confidence and heightened awareness of climate change, leading to negative repercussions on the economy. Additionally, consumer prices increase temporarily, likely due to rising energy and food costs. We find a decline in the monetary policy rate and an increase in government spending, which potentially mitigate the adverse macroeconomic effects. However, we also observe a prolonged rise in public debt relative to GDP and a decrease in r-star following the disasters. With climate change persisting, this could constrain the flexibility of monetary and fiscal policies in the future. Overall, our findings emphasize the urgency of combating climate change and, in tandem, enhancing economic and financial resilience.

Suggested Citation

  • Sandra Eickmeier & Josefine Quast & Yves Schuler, 2024. "Macroeconomic and Financial Effects of Natural Disasters," CAMA Working Papers 2024-23, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2024-23
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2024-03/23_2024_eickmeier_quast_schuler.pdf
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    More about this item

    Keywords

    climate change; natural disasters; transmission; local projections;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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