Unpacking Macroeconomic Impacts of Climate Events and Policy Implications in the Philippines

The Philippines is highly exposed to natural hazards, which are increasingly intensified by climate change, yet quantitative studies on the macroeconomic effects of climate shocks in the country remains limited. This paper finds that category-5 typhoons exert inflationary pressures on regional headline and food CPI, by around 0.4 percent and 0.7 percent respectively, with the peak impact occurring approximately one quarter after the typhoon hits. Additionally, category-5 typhoons lower regional GDP by approximately 0.4 percent on impact (or by 0.2-0.3 percent of aggregate GDP), while agricultural labor productivity declines by 2.5 percent. These estimates show that typhoons act as adverse supply shocks, particularly in the agriculture sector, likely raising inflation while dampening economic activity and further posing a dilemma for monetary policy. We then use the IMF’s Global Dynamic Network (GDN) model to construct counterfactual scenarios to assess the importance of sectoral heterogeneity in shaping output and inflation outcomes and examine alternative monetary policy response functions, helping inform the central bank on tradeoffs between supporting output and containing inflationary pressures. Finally, we use the DIGNAD model to simulate the impacts of natural disasters and analyze the policy trade-offs involved in enhancing resilience to natural disasters and the macro-fiscal implications of various policy options for the Philippines.