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This study proposes a novel method to assess the overall economic effects of agricultural droughts using a coupled agronomic-economic approach that accounts for the direct and indirect impacts of this hazard in the economy. The proposed methodology is applied to Italy, where years showing different drought severity levels were analysed. Agricultural drought stress was measured using the fraction of Absorbed Photosynthetically Active Radiation (fAPAR). Using a comprehensive, field-level dataset on agricultural yields, fAPAR-based statistical models were applied to major Italian crops and direct crop productivity impacts were estimated. Local-level, crop-dependent productivity shocks were fed into a regionalised Computable General Equilibrium model specifically calibrated for the Italian economy. Direct and indirect aggregate impacts after allowing for inter-regional trade and input reallocation were obtained. Total estimated damages ranged from 0.55 to 1.75 billion euro, depending on the overall drought severity experienced, while regional losses showed large spatial variability. Although most of the losses were concentrated on agriculture, other related sectors, such as food industry manufacturing and wholesale services, were also substantially affected. Moreover, our simulations suggested the presence of a land-use substitution effect from less to more drought-resistant crops following a drought. This study sheds light on the characterisation of the total damages caused by droughts while provides a tool with applicability in the implementation of drought risk management plans and the evaluation of drought management policies.
