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Monetary Policy Under Natural Disaster Shocks

Author

Listed:
  • Alessandro Cantelmo
  • Nikos Fatouros
  • Giovanni Melina
  • Chris Papageorgiou

Abstract

With climate change increasing the frequency and intensity of natural disasters, what should central banks do in response to these catastrophic events? Looking at IMF reports for 34 disaster‐years, which occurred in 16 disaster‐prone countries from 1999 to 2017, reveals lack of any systematic approach adopted by monetary authorities in response to climate shocks. Using a small‐open‐economy New‐Keynesian model with disaster shocks, we show that consistent with textbook theory, inflation targeting remains the welfare‐optimal regime. Therefore, the best strategy for monetary authorities is to resist the impulse of accommodating in response to catastrophic natural disasters, and focus on price stability.

Suggested Citation

  • Alessandro Cantelmo & Nikos Fatouros & Giovanni Melina & Chris Papageorgiou, 2024. "Monetary Policy Under Natural Disaster Shocks," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 65(3), pages 1441-1497, August.
    • Handle: RePEc:wly:iecrev:v:65:y:2024:i:3:p:1441-1497
    DOI: 10.1111/iere.12694
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    References listed on IDEAS

    as
    1. Lisa Cameron & Manisha Shah, 2015. "Risk-Taking Behavior in the Wake of Natural Disasters," Journal of Human Resources, University of Wisconsin Press, vol. 50(2), pages 484-515.
    2. McCallum, Bennett T. & Nelson, Edward, 1999. "Nominal income targeting in an open-economy optimizing model," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 553-578, June.
    3. Yongsung Chang & Taeyoung Doh & Frank Schorfheide, 2007. "Non‐stationary Hours in a DSGE Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(6), pages 1357-1373, September.
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    More about this item

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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