Balancing Act: Monetary Policy Responses to Natural Disasters

Tatjana Dahlhaus, Alexander Ueberfeldt and Malik Shukayev

Staff Working Papers from Bank of Canada

Abstract: Natural disasters pose complex challenges for monetary policy in resource-rich small open economies. Using an open-economy dynamic stochastic general equilibrium model calibrated to Canada, we embed stochastic disaster shocks affecting capital, productivity, and the commodity sector. Drawing on detailed historical data, we quantify disaster-specific transmission channels and show that most disasters act as supply shocks, reducing output and modestly raising inflation. The magnitude and persistence of these effects depend on disaster type, sectoral exposure, and spillovers through global trade and terms-of-trade channels. The framework provides a forward-looking assessment of climate-related risks and their implications for monetary policy.

Keywords: Models and tools; Economic models; Monetary policy; Monetary policy framework and transmission; Structural challenges; Climate change (search for similar items in EconPapers)
JEL-codes: C C1 C11 C3 C32 D D6 D63 E E5 E52 Q Q5 Q54 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2026-07
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Related works:
Working Paper: Balancing Act: Monetary Policy Responses to Natural Disasters (2026)
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:26-28

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