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Balancing Act: Monetary Policy Responses to Natural Disasters

Author

Listed:
  • Tatjana Dahlhaus

    (Bank of Canada)

  • Malik Shukayev

    (University of Alberta)

  • Alexander Ueberfeldt

    (Bank of Canada)

Abstract

Natural disasters pose complex challenges for monetary policy in resource-rich small open economies. Using an open-economy dynamic stochastic general equilibrium model calibrated to Canada, we embed stochastic disaster shocks affecting capital, productivity, and the commodity sector. Drawing on detailed historical data, we quantify disaster-specific transmission channels and show that most disasters act as supply shocks, reducing output and modestly raising inflation. The magnitude and persistence of these effects depend on disaster type, sectoral exposure, and spillovers through global trade and terms-of-trade channels. The framework provides a forward-looking assessment of climate-related risks and their implications for monetary policy.

Suggested Citation

  • Tatjana Dahlhaus & Malik Shukayev & Alexander Ueberfeldt, 2026. "Balancing Act: Monetary Policy Responses to Natural Disasters," Working Papers 2026-09, University of Alberta, Department of Economics.
    • Handle: RePEc:ris:albaec:023232
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    File URL: https://sites.ualberta.ca/~econwps/2026/wp2026-09.pdf
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    Keywords

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models

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