Balancing Act: Monetary Policy Responses to Natural Disasters

Natural disasters pose complex challenges for monetary policy in resource-rich small open economies. Using an open-economy dynamic stochastic general equilibrium model calibrated to Canada, we embed stochastic disaster shocks affecting capital, productivity, and the commodity sector. Drawing on detailed historical data, we quantify disaster-specific transmission channels and show that most disasters act as supply shocks, reducing output and modestly raising inflation. The magnitude and persistence of these effects depend on disaster type, sectoral exposure, and spillovers through global trade and terms-of-trade channels. The framework provides a forward-looking assessment of climate-related risks and their implications for monetary policy.