Monetary Policy Under Natural Disaster Shocks

Alessandro  Cantelmo; Nikos Fatouros; Giovanni  Melina; Chris  Papageorgiou

doi:10.1111/iere.12694

Monetary Policy Under Natural Disaster Shocks

Alessandro Cantelmo
, Nikos Fatouros
, Giovanni Melina
, Chris Papageorgiou^*

^*Corresponding author for this work

Economics

Research output: Contribution to journal › Article › peer-review

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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
Journal	International Economic Review
Early online date	7 Mar 2024
DOIs	https://doi.org/10.1111/iere.12694
Publication status	E-pub ahead of print - 7 Mar 2024

Bibliographical note

Funding:
UK's FCDO, Government of the Republic of Korea.

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 13 Climate Action

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10.1111/iere.12694

CantelmoA2024Monetary
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Cite this

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AB - 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.

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Monetary Policy Under Natural Disaster Shocks

Abstract

Bibliographical note

UN SDGs

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