dynamics, revealing adverse effects on the economy's productive capacity. The 5 percent drop in the capital stock reduces potential output by 3 percent. This translates into an immediate reduction of GDP by 1.9 percent, which is mostly driven by a reduction in investment and consumption. The disproportionately larger drop in potential GDP leads to producer price inflation. The reduction in GDP also leads to a slight widening of the public deficit due to automatic stabilizers (that is, revenue is falling more than expenditure). Imports fall by 2 percent in the immediate aftermath of the disaster, and exports fall due to reduced competitiveness, causing the trade deficit to narrow and the real exchange rate to appreciate. While capital stock and potential GDP slowly approach their no-disaster baseline in the following years despite the fall in investment, economic output continues to diverge in subsequent years with the reduction relative to baseline peaking at nearly 2.5 percent after several decades. Investment’s divergence peaks at 3 percent in the first few years but remains depressed throughout the whole simulation period. By year 30, the economy remains in a worse state—capital stock and all demand components are lower. Only the prices and the current account balance revert back to baseline.

Directing public investment toward reconstruction (reported in table 3) significantly speeds up the economy’s recovery and limits its output loss. While the initial shock to GDP is similar, the deviation from baseline is at most 2 percent and falls sooner and more quickly. Due to the reduced investment in new capital in this scenario, where half of public investment is redirected, the economy’s growth potential remains below baseline over the entire simulation period. This recovery scenario is the case generally considered in MFMod and also the one studied by Hallegatte, Jooste, and McIsaac (2024). The immediate impact of the disaster reported in table 3 is identical to the one in table 2. The economy recovers, however, more quickly with all economic indicators closer to baseline. The redirection of public investment to reconstruction efforts repairs all capital stock within five years. The depression of private investment demand because of the fall in output together with lower public investment in new capital stock translates to lower long-run growth. After 30 years, capital stock is 1.6 percent below baseline, while potential and actual output are almost 1 percent below baseline.

Next, we consider how fiscal policy can improve the economy’s recovery from a disaster in the short and long run. To facilitate the comparison to the case of a redirection of public investment considered above in table 3, we hold the resources flowing into reconstruction efforts constant and only vary their funding source. In table 4, the government finances reconstruction via the issuance of new debt rather than a redirection of existing financing. The provision of additional resources to the economy increases government expenditure and investment levels, thereby repairing destroyed capital stock and providing fiscal stimulus. Debt-financing of reconstruction increases the debt-to13