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Authors are grateful to seminar participants at the IMF for their useful comments, suggestions, and advice. This working paper is part of a research project financed by the U.K.’s Department of International Development (DFID) to support macroeconomic research on Low Income Countries. The views expressed in this paper are those of the authors and do not necessarily represent those of the IMF, or of IMF policy, or of DFID.
By contrast, Bevan and Adam (2016) are interested in disaster risk and define the probability of a damaging disaster to follow a negative exponential distribution. Instead, we are focusing on a known disaster, for which aggregate damages to GDP are available.
Labor is perfectly mobile across sectors and returns on private capital are sector-specific, except in the steady state.
Liquidity-constrained households do not have to pay fees for using public infrastructure.
Buffie et al. (2012) also allow transfers to adjust and hence can be used as another policy instrument to close the fiscal gap.
The foreign consumer price index
The fraction of liquidity-constrained households in the economy is given by a > 0.
A low η depicts the case in which the country has an open capital account with the private sector easily borrowing from abroad.
Under a flexible exchange rate regime Δreserves = 0.
The World Bank requires operations for approval to have internal rates of return of at least 12%.
The seawall or the climate-proofing of a road could extend the average number of days in a year when it is passable, allowing it to operate in less than ideal weather conditions.
For simplicity, we are considering the case of rebuilding public standard infrastructure. An alternative could be to consider the reconstruction of total public infrastructure and allocate part of the reconstruction to adaptation investments that would capture the argument of “building back better.”
Another way to think about this is that both the cost of borrowing and the opportunity cost of not investing in infrastructure are likely to be higher after a natural disaster than in quiet times, so it makes sense to “pre-fund” the recovery and reconstruction expenditures that the government knows it is going to incur with near certainty over a few years.