Climate and monetary policy series – Bank Underground

Boromeus Wanengkirtyo, Francesca Diluiso, Rebecca Mari, Jenny Chan, Ambrogio Cesa-Bianchi and Alex Haberis.

Climate change is becoming increasingly important for monetary policy as the world transitions into greener economies and climate change’s physical impacts become more prominent. This is complementary, but distinct to, examining how climate change affects financial stability risks (Carney (2015)). This series of posts highlights how climate change can affect key economic variables such as output and inflation, and thereby the conduct of monetary policy. Climate change and climate policies represent another set of economic shocks and structural changes to monitor, so that monetary policy can meet its objectives.

Climate change also presents some distinct challenges for monetary policy. These include its heterogeneous impact across countries, the unpredictability of physical risks, as well as the uncertainties about the implementation of climate policy, its effects, and how economic agents will respond to them. Reflecting this, the recent literature on climate change and monetary policy has grown rapidly. This series aims to contribute to the debate with several approaches: employing a theoretical business cycle model to assess how different climate policies shape the response to ‘conventional’ macroeconomic shocks, examining the economic effects of climate policies across countries using high-frequency climate policy shocks, and combining granular geospatial and firm-level data.

The first post of this series focuses on some key aspects of climate mitigation policies that could matter for the conduct of monetary policy. The second post highlights cross-country differences: while impacts from current climate policies may appear minor, their effects are heterogeneous across countries and firms. The third and fourth posts examine the physical impacts of climate change, with a focus on flooding, a key physical risk of climate change in the UK. The economic impact of flooding is analysed at both the firm and aggregate level, in addition to how sorting and adaptation investment shape firms’ exposure to flood risks.

Boromeus Wanengkirtyo, Francesca Diluiso and Rebecca Mari work in the Bank’s Structural Economics Division. Jenny Chan works in the Bank’s External MPC Unit. Ambrogio Cesa-Bianchi and Alex Haberis work in the Bank’s Global Analysis Division.

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