The Economic Footprint of Natural Disasters: Demand-side or supply-side forces?

This paper investigates how physical risks disrupt business cycles and hinder the role of monetary policy in stabilizing the economy. We look for evidence to determine whether the effects of natural disasters resemble demand-side shocks or supply-side shocks. We utilize data on natural disasters at both the country-quarter and country-year levels from various sources to ensure the robustness of our analysis. We find evidence that natural disasters act as supply-side shocks, exerting inflationary pressures while simultaneously contracting GDP growth and the output gap, which are persistent. This feature of natural disasters implies that monetary policy strategy becomes more challenging and uncertain following the occurrence of these events. However, these results are heterogeneous across types of disasters, groups of countries, and the severity of the disaster. In low-income countries, the effects of natural disasters are more severe. In high-income countries the non-linear effects become more important.