https://doi.org/10.52903/wp2025354
NATURAL DISASTERS AND THE EFFECTS OF RECONSTRUCTION EXPENDITURE ON OUTPUT
Christos Chrysanthakopoulos
University of Patras, Centre of Planning and Economic Research
Athanasios Tagkalakis
University of Patras, Bank of Greece – Economic Analysis and Research Department, and Hellenic Open University
ABSTRACT
Using a panel of 116 advanced, emerging market and developing economies over the period 1990-2022, we examine the direct effects of natural disasters on economic activity and public finances and the medium-term effects of post-natural disaster reconstruction, through public spending, on economic activity. As anticipated, we find that natural disasters negatively affect both economic activity and public finances with the output effects being more pronounced in the case of extreme vis-à-vis major natural disasters. Employing a panel local projection methodology combined with an instrumental variable approach, and after conducting a series of robustness checks to address endogeneity concerns, the results reveal that reconstruction spending can serve as an effective driver of medium-term growth. Specifically, a 1% increase in real cyclically adjusted government expenditure following an extreme natural disaster leads to a 2.49% increase in real output five years after the shock. Moreover, the effects of reconstruction spending are found to be stronger in countries with lower public debt, lower trade openness, higher financial development, fixed exchange rate regimes, emerging market rather than advanced or least developed economies, countries with higher old-age dependency ratios, and lower agricultural or tourism dependence.
JEL-classifications: E62, F34, O40, Q54, Q58
Keywords: Natural disasters; Government spending; Economic activity; Public finances.
Acknowledgements: We also thank Panagiotis Liargovas, Nikolaos Giannakopoulos, Panagiotis Konstantinou and the participants of the 9th AMEF 2025 and 1st AEFI 2025 conferences organized by the University of Macedonia, University of Thessaloniki and University of Piraeus. The views expressed in this paper are those of the authors and do not necessarily reflect the position of the Centre of Planning and Economic Research or of the Bank of Greece. All remaining errors are ours.
Corresponding author:
Athanasios Tagkalakis
Economic Analysis and Research Department
Bank of Greece
El.Venizelos 21, 10250 Athens, Greece
Tel.: +30-2103202442
email: atagkalakis@bankofgreece.gr