Abstract
With climate change increasing the frequency and intensity of natural disasters, what should central banks do in response to these catastrophic events? Looking at IMF reports for 34 disaster-years, which occurred in 16 disaster-prone countries from 1999 to 2017, reveals lack of any systematic approach adopted by monetary authorities in response to climate shocks. Using a small-open-economy New-Keynesian model with disaster shocks, we show that consistent with textbook theory, inflation targeting remains the welfare-optimal regime. Therefore, the best strategy for monetary authorities is to resist the impulse of accommodating in response to catastrophic natural disasters, and focus on price stability.
Original language | English |
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Journal | International Economic Review |
Early online date | 7 Mar 2024 |
DOIs | |
Publication status | E-pub ahead of print - 7 Mar 2024 |
Bibliographical note
Funding:UK's FCDO, Government of the Republic of Korea.