Monetary Policy Design with Recurrent Climate Shocks

As climate change intensifies, the frequency and severity of climate-induced disasters are expected to escalate. This IMF paper analyses the impact of these events on monetary policy.

The model described in the paper 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.

Results suggest modifying the Taylor rule to give equal weight to responses to both inflation and output growth, indicating a gradual approach to climate-exacerbated economic fluctuations.