Decomposing the Macroeconomic Effects of Natural Disasters: A National Income Accounting Perspective

Abstract

There is an unresolved debate as to whether natural disasters present true obstacles to a country's economic growth and development, given that the empirical evidence is rather heterogeneous. In this paper we explore whether aggregate analyses are likely to mask different responses of the components (export and import, government consumption, investment and private consumption) of Gross Domestic Product (GDP). To this end, we assembled a panel data set of hurricane strikes and national income accounting data for 21 Caribbean countries for the period 1970–2011. We used a panel Vector Autoregressive (VARX) model to take account of the direct impact of the storm shocks and any feedback mechanisms. Our results suggest that the responses on each GDP component differ widely, where we find some effects on export, import, public consumption, investment and private consumption. However, the differences in timing and directions of these impacts demonstrate why it may be difficult to find any clear and large net aggregate impact of hurricanes and natural disasters in general on GDP.