Reconstruction Multipliers

Porcelli, Francesco; Trezzi, Riccardo

Working Paper

Reconstruction Multipliers

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.

Keywords: Natural disasters; Fiscal multipliers; Mercalli scale;

JEL Classification: C36; E62; H70;