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 is able tocan address the long-term real effects of a natural disaster shock to household consumption.
Keywords: DSGE, Natural Disasters, Fiscal PolicyBarro, R. (1990). Government spending in a simple model of endogenous growth. Journal of Political Economy, 98(5),: 103-–125.
Baxter, M., and & King, R. (1993). Fiscal policy in general Equilibrium. American Economic Review, 83(3),: 315-–334.
Carvalho, V. M., & Martins, M. M. (2011). Macroeconomic effects of fiscal consolidations in a DSGE model for the Euro area: Does composition matter?. (Universidade do Porto, Faculdade de Economia do Porto Working Paper No. 421). Place of publication: Publisher.
Christiano, L., Eichenbaum, M., & Rebelo, S. (2011). When is the government spending multiplier large?. Journal of Political Economy, 119(1), 78-–121.
Irmen, A., and & Kuehnel, J. (2009). Productive government expenditure and economic growth. Journal of Economic Surveys, 23(4),: 692-–733.
Keen, B., and & Pakko, M. (2011). Monetary policy and natural disasters in a dsge model. Southern Economic Journal, 77(4),: 983-–990.
Leeper, E., Walker, T., and & Yang, S. (2010). Government investment and fiscal stimulus. Journal of Monetary Economics, 57(8),: 1000-–1012.
Lim, D. (2017). Small open economy DSGE model with natural disaster and Fforeign aid. Policy Brief AKI Research Grants Economic Issues, 9(5), xx–xx.
Roulleau-Pasdeloup, J. (2013). The productive government spending multiplier: In and out of the zero lower bound. (Centre de Recherche economie et Statistique Working Paper No. 2013-02). Place of publication: Publisher.