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Monetary Policy and Natural Disasters in a DSGE Model

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  • Benjamin D. Keen
  • Michael R. Pakko

Abstract

In the immediate aftermath of Hurricane Katrina, speculation arose that the Federal Reserve might respond by easing monetary policy. This article uses a dynamic stochastic general equilibrium (DSGE) model to investigate the appropriate monetary policy response to a natural disaster. We show that the standard Taylor rule response in models with and without nominal rigidities is to increase the nominal interest rate. That finding is unchanged when we consider the optimal policy response to a disaster. A nominal interest rate increase following a disaster mitigates both temporary inflation effects and output distortions that are attributable to nominal rigidities.

Suggested Citation

  • Benjamin D. Keen & Michael R. Pakko, 2011. "Monetary Policy and Natural Disasters in a DSGE Model," Southern Economic Journal, John Wiley & Sons, vol. 77(4), pages 973-990, April.
    • Handle: RePEc:wly:soecon:v:77:y:2011:i:4:p:973-990
    DOI: 10.4284/0038-4038-77.4.973
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    References listed on IDEAS

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    Cited by:

    1. Alessandro Cantelmo, 2022. "Rare Disasters, the Natural Interest Rate and Monetary Policy," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 84(3), pages 473-496, June.
    2. 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.
    3. Celso Brunetti & Matteo Crosignani & Benjamin Dennis & Gurubala Kotta & Donald P. Morgan & Chaehee Shin & Ilknur Zer, 2024. "Climate-Related Financial Stability Risks for the United States: Methods and Applications," Economic Policy Review, Federal Reserve Bank of New York, vol. 30(1), pages 1-37, October.
    4. Pablo Garcia Sanchez, 2022. "Introduction to weather extremes and monetary policy," BCL working papers 163, Central Bank of Luxembourg.
    5. Mongelli, Francesco Paolo & Pointner, Wolfgang & van den End, Jan Willem, 2022. "The effects of climate change on the natural rate of interest: a critical survey," Working Paper Series 2744, European Central Bank.

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