Weather Shocks and the Optimal Policy Mix in a Climate-Vulnerable Economy

Barbara Annicchiarico () and Cédric Crofils ()
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Cédric Crofils: LEDa, Paris-Dauphine and PSL Research Universities, https://www.cedriccrofils.fr/

No 2504, AMSE Working Papers from Aix-Marseille School of Economics, France

Abstract: Using data from a selection of Latin American countries affected by El Ni˜no-Southern Oscillation climate phenomena, we observe that extreme weather events can be highly disruptive for an economy, particularly in the agricultural sector, while also giving rise to inflationary pressures. Motivated by these findings, this paper examines the optimal stabilization policies for a climate-vulnerable economy with two segmented sectors: agriculture (producing food) and manufacturing. In response to climate disasters affecting agriculture, it is found to be optimal to increase fiscal transfers to farmers while maintaining core inflation at its target level. Deviating from the optimal policy mix results in smaller welfare losses as long as core inflation remains stabilized.

Keywords: Climate change; Physical risk; Dual Economy; Optimal Monetary and Fiscal Policy; E-DSGE modeling (search for similar items in EconPapers)
JEL-codes: E32 E52 Q54 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2025-02
New Economics Papers: this item is included in nep-agr, nep-cba, nep-dge and nep-env
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Working Paper: Weather Shocks and the Optimal Policy Mix in a Climate-Vulnerable Economy (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:aim:wpaimx:2504

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