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Monetary Policy in Disaster-Prone Developing Countries

Alessandro Cantelmo, Nikos Fatouros, Giovanni Melina and Chris Papageorgiou

No 2022/067, IMF Working Papers from International Monetary Fund

Abstract: This paper analyzes monetary policy regimes in emerging and developing economies where climate-related natural disasters are major macroeconomic shocks. A narrative analysis of IMF reports published around the occurrence of natural disasters documents their impact on important macroeconomic variables and monetary policy responses. While countries with at least some degree of monetary policy independence typically react by tightening the monetary policy stance, in a sizable number of cases monetary policy was accommodated. Given the lack of consensus on best practices in these circumstances, a small open-economy New-Keynesian model with disaster shocks is leveraged to evaluate welfare under alternative monetary policy rules. Results suggest that responding to inflation to an extent sufficient to keep inflation expectations anchored, while allowing temporary deviations from its target is the welfare maximizing policy. Alternative regimes such as strict inflation targeting, exchange rate pegs, or Taylor rules explicitly responding to economic activity or the exchange rate would be welfare-detrimental.

Keywords: Natural Disasters; Climate Change; DSGE; Monetary Policy; Exchange Rate Regimes.; monetary policy stance; inflation volatility; cases monetary policy; monetary policy response; analysis documentation; Inflation targeting; Inflation; Natural disasters; Monetary policy frameworks; Conventional peg; Caribbean (search for similar items in EconPapers)
Pages: 64
Date: 2022-04-01
New Economics Papers: this item is included in nep-cba, nep-dge, nep-env, nep-mac and nep-mon
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Handle: RePEc:imf:imfwpa:2022/067