Monetary policy under natural disaster shocks

Alessandro Cantelmo (), Nikos Fatouros, Giovanni Melina and Chris Papageorgiou
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Alessandro Cantelmo: Bank of Italy
Giovanni Melina: International Monetary Fund

No 1443, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: With climate change increasing the frequency and intensity of natural disasters, how should central banks respond to these catastrophic events? Looking at IMF reports for 34 disaster-years, which occurred in 16 disaster-prone countries from 1999 to 2017, what emerges is a non-negligible heterogeneity in central banks' responses to climate-related disasters. Using a standard small-open-economy New-Keynesian model with disaster shocks, we show that, consistently with textbook theory, inflation targeting remains the welfare-optimal regime. The best strategy for monetary authorities is to resist the impulse to accommodate in the face of catastrophic natural disasters, and rather to continue to focus on price stability.

Keywords: natural disasters; climate change; DSGE; monetary policy; exchange rate regimes (search for similar items in EconPapers)
JEL-codes: E5 E52 E58 F41 Q54 (search for similar items in EconPapers)
Date: 2024-03
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-env, nep-mon and nep-opm
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Related works:
Journal Article: MONETARY POLICY UNDER NATURAL DISASTER SHOCKS (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1443_24

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