Monetary policy and natural disasters in a DSGE model: how should the Fed have responded to Hurricane Katrina?

Benjamin David Keen () and Michael Pakko ()

No 2007-025, Working Papers from Federal Reserve Bank of St. Louis

Abstract: In the immediate aftermath of Hurricane Katrina, speculation arose that the Federal Reserve might respond by easing monetary policy. This paper uses a dynamic stochastic general equilibrium (DSGE) model to investigate the appropriate monetary policy response to a natural disaster. We show that the standard Taylor (1993) rule response in models with and without nominal rigidities is to increase the nominal interest rate. That finding is unchanged when we consider the optimal policy response to a disaster. A nominal interest rate increase following a disaster mitigates both temporary inflation effects and output distortions that are attributable to nominal rigidities.

Keywords: Monetary policy - United States; Natural disasters - Economic aspects (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Date: 2007
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