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Macroeconomic Consequences of Natural Disasters : A Modeling Proposal and Application to Floods and Earthquakes in Turkey (English)

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.

Details

  • Author

    Hallegatte,Stephane, Jooste,Charl, Mcisaac,Florent John

  • Document Date

    2022/02/22

  • Document Type

    Policy Research Working Paper

  • Report Number

    WPS9943

  • Volume No

    1

  • Total Volume(s)

    1

  • Country

    Türkiye,

  • Region

    Europe and Central Asia,

  • Disclosure Date

    2022/02/22

  • Disclosure Status

    Disclosed

  • Doc Name

    Macroeconomic Consequences of Natural Disasters : A Modeling Proposal and Application to Floods and Earthquakes in Turkey

  • Keywords

    trade and investment; natural disaster; monetary policy; marginal product of capital; private infrastructure capital; constant elasticity of substitution; damage to infrastructure; average productivity of capital; market value of asset; marginal productivity of capital; capital stock; cost of capital; impact of disaster; types of capital; consumption loss; net present value; total factor productivity; nominal interest rate; capital depreciation rate; aggregate capital stock; real business cycle; increase in consumption; response to disaster; rental rate; Type of Investment; loss in productivity; impact of climate; private investment equation; change in supply; increase consumer price; natural disaster shocks; price of energy; natural disaster risk; return on capital; price of output; source of financing; first order condition; determinants of growth; cost of production; effects of shocks; increase in inflation; access to financing; real private investment; demand for capital; corporate tax rate; rate of inflation; permanent income loss; flood damage data; physical capital stock; probability of occurrence; stock of capital; provision of infrastructure

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Citation

Hallegatte,Stephane Jooste,Charl Mcisaac,Florent John

Macroeconomic Consequences of Natural Disasters : A Modeling Proposal and Application to Floods and Earthquakes in Turkey (English). Policy Research working paper,no. WPS 9943 Washington, D.C. : World Bank Group http://documents.worldbank.org/curated/en/479471645554771991/Macroeconomic-Consequences-of-Natural-Disasters-A-Modeling-Proposal-and-Application-to-Floods-and-Earthquakes-in-Turkey