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Monetary policy under natural disaster shocks

Author

Listed:
  • Alessandro Cantelmo

    (Bank of Italy)

  • Nikos Fatouros

    (University of Birmingham)

  • Giovanni Melina

    (International Monetary Fund)

  • Chris Papageorgiou

    (International Monetary Fund)

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.

Suggested Citation

  • Alessandro Cantelmo & Nikos Fatouros & Giovanni Melina & Chris Papageorgiou, 2024. "Monetary policy under natural disaster shocks," Temi di discussione (Economic working papers) 1443, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1443_24
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    File URL: https://www.bancaditalia.it/pubblicazioni/temi-discussione/2024/2024-1443/en_tema_1443.pdf
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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.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    natural disasters; climate change; DSGE; monetary policy; exchange rate regimes;
    All these keywords.

    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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