Impacts of Natural Disasters on a Dynamic Economy

Abstract

This paper presents a modeling framework for macroeconomic growth dynamics; it is motivated by recent attempts to formulate and study 'integrated models' of the coupling between natural and socio-economic phenomena. The challenge is to describe the interfaces between human activities and the functioning of the earth system. We examine the way that this interface works in the presence of endogenous business cycle dynamics, based on a non-equilibrium dynamic model. Recent findings about the macroeconomic response to natural disasters in such a nonequilibrium setting have shown a more severe response to natural disasters during expansions than during recessions. These findings raise questions about the assessment of climate change damages or natural disaster losses that are based purely on long-term growth models. In order to compare the theoretical findings with observational data, we analyze cyclic behavior in the U.S. economy, based on multivariate singular spectrum analysis. We analyze a total of nine aggregate indicators in a 52-year interval (1954–2005) and demonstrate that the behavior of the U.S. economy changes significantly between intervals of growth and recession, with higher volatility during expansions.