Work

Monetary Policy and Natural Disasters in a DSGE Model: How Should the Fed Have Responded to Hurricane Katrina?

Year: 2007

Type: report

Abstract: In the immediate aftermath of Hurricane Katrina, speculation arose that the Federal Reserve might respond by easing monetary policy.This paper uses a dynamic stochastic general equilibrium (DSGE) model to investigate the appropriate monetary policy response to a natural disaster.We show that the standard Taylor (1993) rule response in models with and without nominal rigidities is to increase the nominal interest rate.That finding is unchanged when we consider the optimal policy response to a disaster.A nominal interest rate increase following a disaster mitigates both temporary inflation effects and output distortions which are attributable to nominal rigidities.

DOI: 10.20955/wp.2007.025

Authors: Benjamin D. Keen, Michael R. Pakko

Institutions: University of Oklahoma, University of Arkansas at Little Rock, Federal Reserve

Language: English

Topic: Monetary Policy and Economic Impact

Subfield: General Economics, Econometrics and Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: gold

OpenAlex ID: W1497646256

Cites: 36

Cited by: 14

Related to: 10