The Macroeconomics of Rare Events

Abstract

People in developing countries are more often affected by rare events, such as natural disasters and epidemics, than people in developed nations. Furthermore, the intensity of these events is usually higher in poor countries. Among policymakers, these rare events and other external shocks, such as terms-of-trade fluctuations and changes in international conditions, are often explicitly or implicitly blamed for the bad performance of growth. Do these rare events affect economic growth? Are the frequency and intensity of these rare events helpful in explaining the gap in income between rich and poor countries? The answer to this question is important not only for evaluating policies aimed at preventing these events and mitigating its consequences, but also for understanding the reasons why some countries are rich and some poor. Although there has been a steady increase in the number of researchers tackling these questions, the effects of rare events on economic development and long-run growth remains unclear. There are some studies reporting negative, and others indicating no, or even positive effects. The purpose of this dissertation is to show that these seemingly contradictory findings can be reconciled by exploring the effects of disasters on growth separately by type of disaster. This study examines the long- term economic impact of natural disasters and epidemics and shows that these rare events (natural disasters and epidemics) appear to be associated with different patterns of economic vulnerability and so entail different options for reducing risk. A few main conclusions emerge. Rare events significantly affect economic development but not always negatively, and differently across disasters and economic sectors. Hence, in order to understand and assess the economic consequences of natural disasters and epidemics and the implications for policy, it is necessary to consider the pathways through which different types of events affect economic development, the different risks posed, and the ways in which economies can respond to these threats.