Small Open Economy DSGE Model with Natural Disaster and Foreign Aid

• Main Author: Lim, Dickson A.
• Format: text
• Published: Animo Repository 2017
• Subjects: Disaster Management; economic recovery; foreign aid; Emergency and Disaster Management
• Online Access: https://animorepository.dlsu.edu.ph/res_aki/133; https://animorepository.dlsu.edu.ph/context/res_aki/article/1133/viewcontent/volume_ix_5.pdf
• Institution: De La Salle University

The study has found that an exchange rate intervention by the central bank should be the monetary response to a natural calamity. The rationale is that an exchange rate intervention policy insulates the economy from any Dutch disease effects thereby stabilizing the economy faster than the common inflation targeting rule commonly practiced by central banks. Although the study concludes that an inflation-targeting policy does stabilize inflationary pressure of natural calamities faster, its slow response to a real exchange rate appreciation causes fluctuations in the trade balance and, therefore, to the economy’s final output. In addition, the study found that monetary policy response alone cannot mitigate the long-term real effects of natural calamities, as evidenced by the failure of consumption and final output to return to their predisaster states. Furthermore, an exchange rate intervention also requires that a post-calamity expansionary monetary policy, through a decrease in nominal interest rates, is needed for the real exchange rate to depreciate and counter the Dutch disease effect.