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Disaster Risk in a New Keynesian Model

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  • Marlène Isoré
  • Urszula Szczerbowicz

Abstract

This paper incorporates a small and time-varying “disaster risk” à la Gourio (2012) in a New Keynesian model. A change in the probability of disaster may affect macroeconomic quantities and asset prices. In particular, a higher risk is sufficient to generate a recession without effective occurrence of the disaster. By accounting for monopolistic competition, price stickiness, and a Taylor-type rule, this paper provides a baseline framework of the dynamic interactions between the macroeconomic effects of rare events and nominal rigidity, particularly suitable for further analysis of monetary policy. We also set up our next research agenda aimed at assessing the desirability of several policy measures in case of a variation in the probability of rare events.

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Bibliographic Info

Paper provided by CEPII research center in its series Working Papers with number 2013-12.

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Date of creation: Apr 2013
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Handle: RePEc:cii:cepidt:2013-12

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Keywords: Disaster risk; rare events; DSGE models; business cycles;

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  1. Harald Uhlig, 2007. "Explaining Asset Prices with External Habits and Wage Rigidities in a DSGE Model," 2007 Meeting Papers 97, Society for Economic Dynamics.
  2. Phillippe Weil, 1997. "The Equity Premium Puzzle and the Risk-Free Rate Puzzle," Levine's Working Paper Archive 1833, David K. Levine.
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  11. Barro, Robert, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," Scholarly Articles 3208215, Harvard University Department of Economics.
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  18. Lynch, Anthony W, 1996. " Decision Frequency and Synchronization across Agents: Implications for Aggregate Consumption and Equity Return," Journal of Finance, American Finance Association, vol. 51(4), pages 1479-97, September.
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