This paper contributes to the debate about the implications of natural disasters and climate change for the conduct of monetary policy. In particular, it evaluates the effects of both disaster risk and disaster realizations on the natural interest rate and inflation, under alternative monetary policy responses.
An increase in the probability of natural disaster raises precautionary savings thus permanently reducing the natural interest rate and inflation. When a natural disaster strikes, the signs of the temporary responses of the natural rate and inflation depend on whether supply- or demand-side effects prevail. This requires different responses of the central bank to keep inflation close to the target and mitigate the output losses.
Published in: Oxford Bulletin of Economics and Statistics, v. 84, 3, pp. 473-496
