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Monetary Policy Design with Recurrent Climate Shocks

Author

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  • Mr. Vimal V Thakoor
  • Engin Kara

Abstract

As climate change intensifies, the frequency and severity of climate-induced disasters are expected to escalate. We develop a New Keynesian Dynamic Stochastic General Equilibrium model to analyze the impact of these events on monetary policy. Our model conceptualizes these disasters as left-tail productivity shocks with a quantified likelihood, leading to a skewed distribution of outcomes. This creates a significant trade-off for central banks, balancing increased inflation risks against reduced output. Our results suggest modifying the Taylor rule to give equal weight to responses to both inflation and output growth, indicating a gradual approach to climateexacerbated economic fluctuations.

Suggested Citation

  • Mr. Vimal V Thakoor & Engin Kara, 2023. "Monetary Policy Design with Recurrent Climate Shocks," IMF Working Papers 2023/243, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2023/243
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    Keywords

    Climate change; monetary policy; fiscal policy; Taylor rule; inflation coefficient; skewness curve; monetary policy design; output stability; inflation response; inflation stabilization; Inflation targeting; Inflation; Productivity;
    All these keywords.

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