A Note on Controlling Chaotic Dynamics in the Presence of Climate Change Externalities in the New Keynesian Monetary Economics Model

The role of central banks to mitigate the negative impact of climate change risks on economic development has become crucial in the monetary policy agenda. As recently experienced after the COVID-19 pandemic, unexpected shocks in the energy supply sector can destabilize the productive sector, and thus the solvency of the entire financial system. This paper shows the possibility of the emergence of a shock on the equilibrium pattern due to the emergence of chaotic dynamics and suggests the tools devoted to correcting such behavior. The occurrence of chaos in economics is particularly relevant when the policymaker has to choose the appropriate decisions to achieve the desired growth rate of the economy, without suffering the possible unwanted oscillations on national income. The idea is that if the economy is stabilized at its highest growth rate, then any possible low-growth poverty trap is avoided. Our idea is to consider a monetary economics model with an externality factor due to climate impacts on labor force and show the parametric condition for the emergence of chaotic dynamics. We then apply a correction algorithm that allows us to determine the restrictions on the parameter set necessary to eliminate or control the chaotic dynamics and restore the stability of equilibrium. Our findings are finally sustained by real data that show a possible link between adverse climatic scenarios and the intervention of the monetary authority, but also confirm that if the interest rates are raised above a sustainable target, then the economy will start to oscillate around the desired long-run equilibrium, thus experiencing periods of unwanted fall in real output, that are in fact a poverty trap.