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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.

Suggested Citation

  • Marlène Isoré & Urszula Szczerbowicz, 2013. "Disaster Risk in a New Keynesian Model," Working Papers 2013-12, CEPII research center.
    • Handle: RePEc:cii:cepidt:2013-12
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    References listed on IDEAS

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    Cited by:

    1. Jesús Fernández‐Villaverde & Oren Levintal, 2018. "Solution methods for models with rare disasters," Quantitative Economics, Econometric Society, vol. 9(2), pages 903-944, July.
    2. Isoré, Marlène & Szczerbowicz, Urszula, 2017. "Disaster risk and preference shifts in a New Keynesian model," Journal of Economic Dynamics and Control, Elsevier, vol. 79(C), pages 97-125.

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    More about this item

    Keywords

    Disaster risk; rare events; DSGE models; business cycles;
    All these keywords.

    JEL classification:

    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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