No. 1443 - Monetary policy under natural disaster shocks

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by Alessandro Cantelmo, Nikos Fatouros, Giovanni Melina and Chris PapageorgiouMarch 2024

This paper evaluates the implications of severe natural disasters for the conduct of monetary policy in emerging and developing countries. We first document the impact of climate-related natural disasters that occurred in the last two decades on GDP, inflation and central banks' responses. Then, we use a theoretical model to assess the welfare implications of alternative monetary policy regimes.

Natural disasters are typically followed by a decline in output and an increase in inflation. In a slight majority of cases, central banks have tightened monetary policy. The theoretical model suggests that the desirable policy would focus on price stability by allowing temporary deviations of inflation from the target to avoid weighing further on economic activity.

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