Macroeconomic Consequences of Natural Disasters : A Modeling Proposal and Application to Floods and Earthquakes in Turkey
Turkey is vulnerable to natural disasters that can generate substantial damages to public and private sector infrastructure capital. Earthquakes and floods are the most frequent hazards today, and flood risks are expected to increase with climate c...
| Main Authors: | , , |
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| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
Washington, DC: World Bank
2022
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/479471645554771991/Macroeconomic-Consequences-of-Natural-Disasters-A-Modeling-Proposal-and-Application-to-Floods-and-Earthquakes-in-Turkey http://hdl.handle.net/10986/37060 |
| Summary: | Turkey is vulnerable to natural
disasters that can generate substantial damages to public
and private sector infrastructure capital. Earthquakes and
floods are the most frequent hazards today, and flood risks
are expected to increase with climate change. To ensure
stability and growth and minimize the welfare impact of
these disasters, these shocks need to be managed and
accounted for in macro-fiscal and monetary policy. To
support this process, the World Bank Macrostructural Model
is adapted to assess the macroeconomic effects of natural
(geophysical or climate-related) disasters. The
macroeconomic model is extended on several fronts: (1) a
distinction is made between infrastructure and
non-infrastructure capital, with complementary or
substitutability between the two categories; (2) the
production function is adjusted to account for short-term
complementarity across capital assets; (3) the
reconstruction process is modeled in a way that accounts for
post-disaster constraints, with distinct processes for the
reconstruction of public and private assets. The results
show that destroyed infrastructure capital makes the
remaining non-infrastructure capital less productive, which
means that disasters reduce the total stock of capital, but
also its productivity. The welfare impact of a
disaster—proxied by the discounted consumption loss—is found
to increase non-linearly with direct asset losses.
Macroeconomic responses reduce the welfare impact of minor
disasters but magnify it when direct asset losses exceed the
economy’s absorption capacity. The welfare impact also
depends on the pre-existing economic situation, the ability
of the economy to reallocate resources toward
reconstruction, and the response of the monetary policy.
Appropriate macro-fiscal and monetary policies offer
cost-effective opportunities to mitigate the welfare impact
of major disasters. |
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