CEPII, Recherche et Expertise sur l'economie mondiale
Disaster Risk in a New Keynesian Model

Marlène Isoré
Urszula Szczerbowicz

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 Abstract :
This paper incorporates a small and time-varying “disaster risk” à la Gourio (2012) in a New Keynesian model. A change in the probability of disaster may affect macroeconomic quantities and asset prices. In particular, a higher risk is sufficient to generate a recession without effective occurrence of the disaster. By accounting for monopolistic competition, price stickiness, and a Taylor-type rule, this paper provides a baseline framework of the dynamic interactions between the macroeconomic effects of rare events and nominal rigidity, particularly suitable for further analysis of monetary policy. We also set up our next research agenda aimed at assessing the desirability of several policy measures in case of a variation in the probability of rare events.

 Keywords : Disaster risk | rare events | DSGE models | business cycles

 JEL : E17, E20, E32, G12
CEPII Working Paper
N°2013-12, April 2013

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