Costly disasters and the role of fiscal policy
We examine the dynamic effects of natural disasters in US states and relate them to state and federal fiscal policy actions. Typically, disasters have important negative output but less severe unemployment consequences. Real effects vary spatially: coastal and poor states recover more slowly. Countercyclical fiscal policy reduces the severity of the real downfall. States with less stringent budgetary requirements and/or budget stabilization funds face smaller real costs. State spending is more effective than federal spending in reducing the negative effects of the disaster shock at the cost of mild and temporary increases in state debt.