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Rare Disasters, the Natural Interest Rate and Monetary Policy

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  • Alessandro Cantelmo

Abstract

This article evaluates the impact of rare disasters on the natural interest rate and inflation, and their implications for monetary policy, by using data on natural disasters in OECD countries. Ex‐ante, disaster risk behaves as a negative demand shock and permanently lowers the natural rate and inflation. These effects become larger and nonlinear if the frequency of extreme natural disasters increases. Ex‐post, a disaster realization leads to temporarily higher or lower natural rate and inflation depending on whether supply‐ or demand‐side effects prevail. The article hence shows the importance of disentangling disaster strikes from disaster risk in shaping monetary policy.

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  • 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.
    • Handle: RePEc:bla:obuest:v:84:y:2022:i:3:p:473-496
    DOI: 10.1111/obes.12490
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    1. Rare disasters, the natural interest rate and monetary policy
      by Christian Zimmermann in NEP-DGE blog on 2021-01-13 18:04:03

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    4. Jair Ojeda-Joya, 2022. "A Counterfactual Analysis of the Effects of Climate Change on the Natural Interest Rate," IHEID Working Papers 10-2022, Economics Section, The Graduate Institute of International Studies.
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    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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