A methodology for incorporating natural catastrophes into macroeconomic projections

Abstract

This paper addresses a critical problem in macroeconomic planning for natural disaster losses: how to incorporate potential future losses into current planning activity. The authors develop a technique to integrate probabilistic natural hazard losses into macroeconomic planning models. Probabilistic losses to capital stock (direct losses) serve as input to a macroeconomic model, which consequently calculates the macroeconomic impacts. The macroeconomic effects calculated comprise the indirect effects of losing and not being able to replace capital stock sufficiently or in a timely manner, as well as the effects of diverting funds to relief and reconstruction activities. The modeling can serve as a tool for planning for the effects of natural disasters before they occur and for engaging in appropriate risk management activities.