Macroeconomic and Financial Effects of Natural Disasters

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. Show more