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Transmission of Flood Damage to the Real Economy and Financial Intermediation: Simulation Analysis using a DSGE Model

Author

Listed:
  • Ryuichiro Hashimoto

    (Bank of Japan)

  • Nao Sudo

    (Bank of Japan)

Abstract
This paper quantitatively assesses the indirect effect of floods on the real economy and financial intermediation in Japan by estimating a dynamic stochastic general equilibrium (DSGE) model that incorporates a mechanism through which floods cause the capital stock and the public infrastructure to depreciate exogenously, using the data on flood damage recorded in the Flood Statistics released by the Japanese government. The result of the analysis is twofold. First, flood shocks dampen GDP from the supply side by reducing the capital stock inputs. The decline in GDP then impairs the balance sheets of firms and financial intermediaries, resulting in disruptions to financial intermediation and thus dampening GDP further from the demand side. Even when the direct damage due to floods is fully covered by insurance, the downward pressure on GDP endogenously deteriorates the balance sheets of these sectors, causing the same mechanism to operate. Second, the quantitative impacts of flood shocks on GDP up to now have been minor compared to the standard structural shocks that are considered important in existing macroeconomic studies, including shocks to total factor productivity (TFP) and the subjective discount factor. According to the estimates that use the relationship between the key variables in our model together with climate change scenarios published by an external organization, the impacts of these shocks could become somewhat larger in the future.

Suggested Citation

  • Ryuichiro Hashimoto & Nao Sudo, 2022. "Transmission of Flood Damage to the Real Economy and Financial Intermediation: Simulation Analysis using a DSGE Model," Bank of Japan Working Paper Series 22-E-5, Bank of Japan.
    • Handle: RePEc:boj:bojwps:wp22e05
    as

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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Transmission of Flood Damage to the Real Economy and Financial Intermediation: Simulation Analysis using a DSGE Model
      by Christian Zimmermann in NEP-DGE blog on 2022-07-29 13:32:36

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    More about this item

    Keywords

    Climate change; Natural disasters; Physical risk; Financial System; DSGE model;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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