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Natural Disasters Impacting a Macroeconomic Model with Endogenous Dynamics

S. Hallegatte, M. Ghil, Ecological Economics, Volume 68, Issues 1-2, 1 December 2008, Pages 582-592

mardi 8 janvier 2008, par Stéphane Hallegatte

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We investigate the macroeconomic response to natural disasters by using an endogenous business cycle (EnBC) model in which cyclical behavior arises from the investment-profit instability. Our model exhibits a larger response to natural disasters during expansions than during recessions. This apparently paradoxical result can be traced to the disasters amplifying pre-existing disequilibria during expansions, while the existence of unused resources during recessions damps exogenous shocks. It thus appears that high-growth periods are also highly vulnerable to supply-side shocks. In our EnBC model, the average production loss due to a set of disasters distributed at random in time is highly sensitive to the dynamical characteristics of the impacted economy. Larger economic flexibility allows for a more efficient and rapid response to disasters and reduces production losses. On the other hand, too high a flexibility can lead to vulnerability phases that cause average production losses to soar. These results raise questions about the assessment of climate change damages or natural-disaster losses that are based purely on long-term growth models ; they also suggest the existence of an optimal range for investment flexibility.

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