Monetary Policy in Disaster-Prone Developing Countries

By Alessandro Cantelmo, Nikos Fatouros, Giovanni Melina, Chris Papageorgiou

April 1, 2022

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Alessandro Cantelmo, Nikos Fatouros, Giovanni Melina, and Chris Papageorgiou. Monetary Policy in Disaster-Prone Developing Countries, (USA: International Monetary Fund, 2022) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper analyzes monetary policy regimes in emerging and developing economies where climate-related natural disasters are major macroeconomic shocks. A narrative analysis of IMF reports published around the occurrence of natural disasters documents their impact on important macroeconomic variables and monetary policy responses. While countries with at least some degree of monetary policy independence typically react by tightening the monetary policy stance, in a sizable number of cases monetary policy was accommodated. Given the lack of consensus on best practices in these circumstances, a small open-economy New-Keynesian model with disaster shocks is leveraged to evaluate welfare under alternative monetary policy rules. Results suggest that responding to inflation to an extent sufficient to keep inflation expectations anchored, while allowing temporary deviations from its target is the welfare maximizing policy. Alternative regimes such as strict inflation targeting, exchange rate pegs, or Taylor rules explicitly responding to economic activity or the exchange rate would be welfare-detrimental.

Subject: Conventional peg, Environment, Foreign exchange, Inflation, Inflation targeting, Monetary policy, Monetary policy frameworks, Natural disasters, Prices

Keywords: Analysis documentation, Caribbean, Cases monetary policy, Climate Change, Conventional peg, DSGE, Exchange Rate Regimes., Inflation, Inflation targeting, Inflation volatility, Monetary Policy, Monetary policy frameworks, Monetary policy response, Monetary policy stance, Natural disasters, Natural Disasters

Publication Details

Pages:

64
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2022/067
Stock No:

WPIEA2022067
ISBN:

9798400204371
ISSN:

1018-5941

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