Monetary Policy Design with Recurrent Climate Shocks

November 24, 2023

Preview Citation

Format: Chicago

Vimal V Thakoor, and Engin Kara. Monetary Policy Design with Recurrent Climate Shocks, (USA: International Monetary Fund, 2023) accessed December 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

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.

Subject: Inflation, Inflation targeting, Monetary policy, Prices, Production, Productivity, Public debt

Keywords: Climate change, Fiscal policy, Inflation, Inflation coefficient, Inflation response, Inflation stabilization, Inflation targeting, Monetary policy, Monetary policy design, Output stability, Productivity, Skewness curve, Taylor rule

Publication Details

Pages:

44
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2023/243
Stock No:

WPIEA2023243
ISBN:

9798400257261
ISSN:

1018-5941

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