The Macroeconomic Returns of Investment in Resilience to Natural Disasters under Climate Change: A DSGE Approach

By Emilio Fernández Corugedo, Andres Gonzalez, Alejandro D Guerson

June 30, 2023

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Emilio Fernández Corugedo, Andres Gonzalez, and Alejandro D Guerson. The Macroeconomic Returns of Investment in Resilience to Natural Disasters under Climate Change: A DSGE Approach, (USA: International Monetary Fund, 2023) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper presents a Markov switching dynamic stochastic general equilibrium model designed to evaluate the macroeconomic return of adaptation investment to natural disasters (NDs) and the impact of climate change. While the model follows the existing literature in assuming that NDs destroy a share of the public and private capital stocks and a government that can invest in adaptation at an additional cost, it adds several features that are key to the analysis, both in the near (transition) and long (steady state) terms. Those include incomplete markets, financial frictions with collateral constraints, foreign remittances, full menu of tax and government spending instruments, and endogenous climate risk premium. The model is calibrated to the case of Dominica. It finds that NDs have large and persistent negative effects on output and public finances. It also shows that adaptation investment has large returns in terms of private investment, employment, output and tax revenue in the long term, especially under climate change.

Subject: Climate change, Consumption, Environment, National accounts, Natural disasters, Return on investment, Revenue administration

Keywords: Adaptation investment, Caribbean, Climate adaptation policies, Climate change, Consumption, Dominica, DSGE, Endogenous climate risk premium, Financial frictions, Global, Government spending instrument, Investment producer, Moment calibration summary, Natural disasters, ND event, Resilient capital, Return on investment

Publication Details

Pages:

49
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2023/138
Stock No:

WPIEA2023138
ISBN:

9798400243004
ISSN:

1018-5941

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