The role of fiscal policy in a natural disaster-prone economy

Abstract

Theoretical work done on the macroeconomic impact of natural disasters has neglected the role of fiscal policy in stabilizing other sectors of the economy. Although inclusion of a public sector with a fiscal authority in macroeconomic models is common in the literature, most of these models assume that government expenditures are unproductive in that they do not accrue to anyone but the government. In reality, for a model that incorporates natural disaster and foreign aid, having a productive fiscal authority that produces public goods and services, as well as infrastructure, is necessary to capture the real effects of foreign aid in alleviating the adverse effects of natural disaster to an economy. The study has found that fiscal policy can address the long-term real effects of a natural disaster shock to household consumption.