Droughts and deficits: The global impact of droughts on economic growth

This paper is related to the recent empirical literature on the effects of dry shocks and droughts on economic performance.  Much of this work exploits granular data on local water availability, to estimate the direct and indirect impacts of rainfall variability or water availability on economic productivity. 

The results show that increases in soil moisture in previous years can neutralize the harmful impacts from a dry shock, with suggestive evidence that local and upstream forest cover are key channels through which these impacts manifest. These findings have important implications for measuring the economic impact of droughts and can inform adaptation investments.