The Impact of Natural Disasters on Economic Growth

Abstract

This paper studies the impact of natural disasters on economic growth in an endogenous growth model. Production with the use of fossil fuels as input brings about air pollution, which can be one of the causes of climate change. Climate change may be accompanied by natural disasters that causes serious damage to physical capital stock. We assumed that when more polluting inputs are used, the risk of natural disaster is greater, which results in more damage to capital stock. We examine the social planner’s problem taking the risk of natural disasters into account. We show that a steady state exists and that it is saddle path stable. In addition, optimal growth with natural disasters is positive but lower than that without pollution and natural disasters.