Finance and Economics Discussion Series (FEDS)

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October 2014 (Revised January 2016)

Reconstruction multipliers

Francesco Porcelli and Riccardo Trezzi

Abstract:

Following the 2009 L'Aquila earthquake, financing of reconstruction by the Italian central government resulted in a sharp and unanticipated discontinuity in grants across municipalities that were ex-ante very similar. Using the emergency financing law as an instrument, we identify the causal effect of municipal government spending on local activity, controlling for the negative supply shock from the earthquake. In our estimates, this "reconstruction multiplier" is around unity, and we show that the grants provided public insurance. Economic activity contracted in municipalities that did not receive the grants, while it expanded--or at least did not contract--in municipalities that did receive them. Our results suggest several policy implications with respect to the allocation mechanism of such grants.

Revision - Accessible materials (.zip)

Original: Full paper (PDF) | Accessible version (.zip)

Keywords: Natural disasters, fiscal multipliers, Mercalli scale

PDF: Full Paper

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Last Update: June 26, 2020