Introduction to special issue: The economics of catastrophes

Abstract

According to the Online Etymology Dictionary, the word catastrophe can be traced back to the 1530s when its meaning was ‘reversal of what is expected’ (especially a fatal turning point in a drama, the winding up of the plot)—from Latin catastropha, from Greek katastrophē ‘an overturning; a sudden end’. In contemporary macroeconomic textbooks, the reader will be familiar with the term ‘adverse (or negative) shocks’. Adverse shocks are those events that are unpredictable, that is, cannot be forecasted, and that negatively affect GDP, or its components. Adverse shocks are probably what is most closely related to the etymological meaning of the word catastrophe. This special issue, titled, ‘The Economics of Catastrophes’ brings together the work of leading scholars on the topic. It contains eight papers, five of which are specifically on the Australian economy. The following paragraphs provide a brief summary of each of the papers contained in the special issue.

John Freebairn's paper, titled ‘Natural disasters and economic policy challenges’, evaluates the impacts of natural disasters on economic and policy decisions. Freebairn (2024) proposes that while governmental subsidies for flood-affected households aim to provide immediate relief, such subsidies may inadvertently incentivise lower-income individuals to continue living in more disaster-prone regions—causing long-term negative societal impacts. Freebairn critically evaluates the role governments play in shaping the decisions of households and businesses when opting for locations prone to natural disasters. He deliberates on the provision of special financial subsidies to disaster-affected households and businesses, a decision often influenced by media and political pressures. Freebairn argues that subsidies for flood-affected households can unintentionally discourage individuals from relocating to safer areas while also reducing incentives for implementing disaster mitigation strategies. As a result of subsidies, the costs of future disaster events to society may increase while contributing to inequity over the long term. It is important to note that Freebairn's argument applies to subsidies that are granted in case of expected natural disasters: that is, to people living in areas which are well-known to have a non-zero probability of being struck by major floods.

‘Catastrophe theory and economic modelling at the back of an envelope’ by Eduardo Pol (2024) provides a detailed examination of the application of catastrophe theory (CT) in economic modelling. Pol outlines a step-by-step process of how to use CT in economic modelling. Pol addresses prior critiques of CT's limited relevance in economic modelling. He discusses how CT combines optimisation, comparative statics, and dynamics into a single mathematical tool and gives a systematic procedure for its application in economics.

The paper ‘How Australia's economy gained momentum because of Covid-19’ by Pierre Rostan and Alexandra Rostan (2024) provides an insightful exploration into the economic impact of Covid-19 on Australia. Leveraging spectral analysis forecasting, the authors delve into the Australian Government's response to the pandemic, which included support for both employers and individuals. A key focus of the paper is the resilience of Australia's economy during the crisis. The authors examined the impact of programs such as the JobMaker Hiring Credit scheme and JobKeeper Payment program, which provided a wage subsidy to impacted businesses. The authors find that these programs, which constituted an expenditure of an estimated AUD 311 billion, were instrumental in keeping Australia's real GDP growth rate in positive territory beyond the first quarter of 2023.

‘Australia's gambling epidemic: The role of Covid-19 support payment’ by Opoku Adabor (2024) analyses the influence of Covid-19 support funds on the severity of gambling in Australia. Data from 4622 gamblers in the Household, Income and Labour Dynamics in Australia survey were used. The findings reveal that various Covid-19 support payments such as job seeker's support, quarantine support, and stimulus support payments increased gambling, particularly among male gamblers and online gamblers. The author proposes policy changes, suggesting reducing the amounts of Covid-19 support payments given to gamblers to decrease gambling spending. The study concludes that further research should explore factors mediating the relationship between Covid-19 support payments and gambling, such as lockdown restrictions and price fluctuations.

The paper titled ‘Impact of global macroeconomic factors on spillovers among Australian sector markets: Fresh findings from a wavelet-based analysis’ by Jiang et al. (2024) investigates the relationship between global macroeconomic factors and the spillover dynamics of 10 Australian sectoral indices. The study employs a time-varying parameter vector autoregressive model, wavelet coherence analysis, and wavelet decomposition-based Granger causality to examine data from 14 May 2007 to 31 March 2022 to identify net transmitters and receivers of stock market spillovers. The results indicate that sectors, such as Industrials, Consumer Discretionary, and Financials, act as net transmitters of spillovers while sectors such as Health, Information Technology, and Utilities, are primarily net receivers. The study shows that the intricate connectedness is time-varying and tends to intensify during periods of marked economic difficulties, such as the Great Recession and the ongoing COVID-19 pandemic. The research demonstrates that global macroeconomic factors, including oil and exchange rates as well as oil volatility, stock market volatility and the Infectious Disease Tracker Index, significantly drive the connectedness of the Australian sectoral indices. The findings furnish valuable insights for investors and policymakers. Investors can be informed by the findings with regard to optimal portfolio design and risk management strategies. Policymakers gain important understandings about the Australian sectors' responses to global influences and volatility, thereby contributing to strategic decision-making in a globally interconnected economic landscape.

‘Hiding the elephant: The tragedy of Covid policies and its economist apologetics’ by Gigi Foster and Paul Frijters (2024) evaluates the costs and benefits of lockdown policies in response to Covid-19. In many countries throughout the world during 2020 and 2021, governments announced lockdown policies. The lockdown policies were enforced by the police. And the majority of people abided by these policies. The striking point made by Foster and Frijters is that, before the lockdown policies were implemented there was no convincing evidence that the benefits from lockdown policies would exceed the costs. The lockdown policies were thus in violation with the Nuremberg code. Ex-post calculations based on the concept of WELLBYs suggest that the costs of lockdowns far exceeded their benefits. According to Foster and Frijters, estimates from six different teams across the Anglo-Saxon world indicate that the costs to society as a whole, measured in terms of WELLBYs taken from the whole population, outweighed the benefits of lockdown by a ratio ranging between 4:1 and 1000:1.

The paper ‘The causal effect of political risk on the stock market: Evidence from a natural experiment’ by Li et al. (2024) uses the unexpected Taiwan misfired missile event on 1 July 2016 as an exogenous shock to examine the causal impact of political risk on the stock market. Specifically, the researchers focus on Taiwan-related A-share firms in the Chinese stock market. Their findings indicate that political uncertainty related to Taiwan significantly impacts the stock prices of Taiwan-related A-share firms negatively. This impact is particularly pronounced for firms with a stronger relationship with Taiwan and for non-state-owned enterprises. The negative effects are primarily driven by an increased required rate of return due to heightened political uncertainty. Interestingly, the study finds no support for hypotheses that suggested a deterioration in either operating performance or analyst earnings forecast of Taiwan-related firms following the event. This study extends existing literature by evidencing the substantial influence of political risk on stock market performance, thus advocating for its inclusion in investment strategies and risk assessments by market participants.

‘Risk contagion in financial markets: A systematic review using bibliometric methods’ by Su et al. (2024) presents a comprehensive analysis of studies on financial contagion. The analysis highlights a growing interest in risk contagion studies within unconventional assets, such as cryptocurrencies. The paper also notes an increase in Covid-19 pandemic and financial contagion studies since 2020. The study employs both co-occurrence network and co-citation network analysis. Furthermore, it reveals that the number of theoretical studies remains unbalanced with the count of empirical studies overwhelmingly higher. Most of the reviewed studies focused on volatility spills from banking and equity markets, suggesting that future research could lean more towards investor behaviour and macroeconomic policy coordination.