We examine the effect of natural disasters on the size of the local public spending multiplier in U.S state economies. Using state-level military spending and disaster damages, we show that the local multiplier is significantly larger for states experiencing a natural disaster. We use a New Keynesian framework with rare disasters and government spending shocks to interpret our results. We show that a rise in public expenditures during a disaster shock induces a larger output expansion because of a lower crowding-out of private investment. A disaster raises investment incentives to reconstruct capital. This makes households reduce more consumption and sacrifice less savings in response to a public spending shock. The stronger wealth effect translates in a larger rise in labor supply and a lower fall in investment, thereby strengthening the output expansion.

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