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Monetary Policy in Disaster-Prone Developing Countries

Author

Listed:
  • Mr. Alessandro Cantelmo
  • Nikos Fatouros
  • Mr. Giovanni Melina
  • Mr. Chris Papageorgiou
Abstract
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.

Suggested Citation

  • Mr. Alessandro Cantelmo & Nikos Fatouros & Mr. Giovanni Melina & Mr. Chris Papageorgiou, 2022. "Monetary Policy in Disaster-Prone Developing Countries," IMF Working Papers 2022/067, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2022/067
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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=515685
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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Monetary Policy in Disaster-Prone Developing Countries
      by Christian Zimmermann in NEP-DGE blog on 2022-05-23 21:19:06

    Citations

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    Cited by:

    1. Asim Iqbal & Aftab Anwar & Khalil Ahmad, 2023. "Institutional Development And Business Freedom: Insights From Developing Nations," Bulletin of Business and Economics (BBE), Research Foundation for Humanity (RFH), vol. 12(2), pages 457-465.
    2. Marc Audi & Marc Poulin & Amjad Ali, 2024. "Determinants of Business Freedom in Developing Countries: The Role of Institutional Development and Policy Mix," International Journal of Economics and Financial Issues, Econjournals, vol. 14(4), pages 188-199, July.
    3. Alain N. Kabundi & Mr. Montfort Mlachila & Jiaxiong Yao, 2022. "How Persistent are Climate-Related Price Shocks? Implications for Monetary Policy," IMF Working Papers 2022/207, International Monetary Fund.

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