Title: Climate disaster risk, regime switching and monetary policy
Authors: Willi Semmler - New School for Social Research (United States) [presenting]
Stefan Mittnik - University of Munich (Germany)
Abstract: The macroeconomic and financial market impact of rare large disasters has since the Great Recession of the years 2007/9 been studied in much literature. Those disasters are seen to have both large real effects (capital and output losses) and financial market effects (shift of discount rates, risk premia, asset prices, and returns). Such effects of large financial crashes studied in financial economics are also shown to be essential for climate-related rare disasters. Insights of the former are used to study the effects of disaster risks in the macroeconomics of climate change. The empirics of disaster risks in climate economics shows a link between GDP growth, greenhouse gas emission, climate change and climate-related disasters. The proposed model uses calibrated rare large disaster shocks and their effects on output and capital losses and rising risk premia in a multi-phase dynamic decision model. We build on previous works which develop such a multi-phase decision model. The model is solved via the non-linear programming method AMPL which is augmented by an arc parametrization method (APM). The proposed method can deal with regime shifts, arising from large disaster shocks, in a multi-regime model. Such a model is also suitable to include fiscal and financial policies to address the issue of mitigation of and adaptation to disaster risks.