Monetary policy and natural disasters in a DSGE model: how should the Fed have responded to Hurricane Katrina?
In the immediate aftermath of Hurricane Katrina, speculation arose that the Federal Reserve might respond by easing monetary policy. This paper 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 (1993) 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.
|Date of creation:||2007|
|Contact details of provider:|| Postal: P.O. Box 442, St. Louis, MO 63166|
Web page: http://www.stlouisfed.org/
More information through EDIRC
|Order Information:|| Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gavin, William T. & Keen, Benjamin D. & Pakko, Michael R., 2009.
"Inflation Risk And Optimal Monetary Policy,"
Cambridge University Press, vol. 13(S1), pages 58-75, May.
- William T. Gavin & Benjamin D. Keen & Michael R. Pakko, 2007. "Inflation risk and optimal monetary policy," Working Papers 2006-035, Federal Reserve Bank of St. Louis.
- King, Robert G & Watson, Mark W, 2002. "System Reduction and Solution Algorithms for Singular Linear Difference Systems under Rational Expectations," Computational Economics, Springer;Society for Computational Economics, vol. 20(1-2), pages 57-86, October.
- Pakko Michael R., 2005. "Changing Technology Trends, Transition Dynamics, and Growth Accounting," The B.E. Journal of Macroeconomics, De Gruyter, vol. 5(1), pages 1-42, December.
- Michael R. Pakko, 2005. "Changing technology trends, transition dynamics and growth accounting," Working Papers 2000-014, Federal Reserve Bank of St. Louis.
- Chari, V. V. & Christiano, Lawrence J. & Eichenbaum, Martin, 1998. "Expectation Traps and Discretion," Journal of Economic Theory, Elsevier, vol. 81(2), pages 462-492, August.
- V.V. Chari & Lawrence J. Christiano & Martin Eichenbaum, 1996. "Expectation traps and discretion," Working Paper Series, Macroeconomic Issues WP-96-5, Federal Reserve Bank of Chicago.
- V. V. Chari & Lawrence J. Christiano & Martin Eichenbaum, 1996. "Expectation Traps and Discretion," NBER Working Papers 5541, National Bureau of Economic Research, Inc.
- V.V. Chari & Lawrence J. Christiano & Martin Eichenbaum, 1996. "Expectations, traps and discretion," Working Papers in Applied Economic Theory 96-04, Federal Reserve Bank of San Francisco.
- Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
- Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
- Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
- Christopher J. Erceg & Dale W. Henderson & Andrew T. Levin, 1999. "Optimal monetary policy with staggered wage and price contracts," International Finance Discussion Papers 640, Board of Governors of the Federal Reserve System (U.S.).
- Andrew Levin & Christopher J. Erceg & Dale W. Henderson, 1999. "Optimal Monetary Policy with Staggered Wage and Price Contracts," Computing in Economics and Finance 1999 1151, Society for Computational Economics.
- Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-224, January.
- Fumio Hayashi, 1981. "Tobin's Marginal q and Average a : A Neoclassical Interpretation," Discussion Papers 457, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Christopher J. Neely, 2004. "The Federal Reserve responds to crises: September 11th was not the first," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 27-42.
- Christopher J. Neely, 2003. "The Federal Reserve responds to crises: September 11th was not the first," Working Papers 2003-034, Federal Reserve Bank of St. Louis.
- Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, 09.
- Frank Smets & Raf Wouters, 2002. "An estimated dynamic stochastic general equilibrium model of the euro area," Working Paper Research 35, National Bank of Belgium.