How Persistent are Climate-Related Price Shocks? Implications for Monetary Policy

By Alain N. Kabundi, Montfort Mlachila, Jiaxiong Yao

October 28, 2022

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Format: Chicago

Alain N. Kabundi, Montfort Mlachila, and Jiaxiong Yao. How Persistent are Climate-Related Price Shocks? Implications for Monetary Policy, (USA: International Monetary Fund, 2022) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Climate change is likely to lead to more frequent and more severe supply and demand shocks that will present a challenge to monetary policy formulation. The main objective of the paper is to investigate how climate shocks affect consumer prices in a broad range of countries over a long period using local projection methods. It finds that the impact of climate shocks on inflation depends on the type and intensity of shocks, country income level, and monetary policy regime. Specifically, droughts tend to have the highest overall positive impact on inflation, reflecting rising food prices. Interestingly, floods tend to have a dampening impact on inflation, pointing to the predominance of demand shocks in this case. Over the long run, the dominant monetary policy paradigm of flexible inflation targeting faced with supply-induced climate shocks may become increasingly ineffective, especially in LIDCs. More research is needed to find viable alternative monetary policy frameworks.

Subject: Climate change, Environment, Inflation, Monetary policy, Monetary policy frameworks, Natural disasters, Prices

Keywords: Caribbean, Climate change, Food price inflation drought, Global, IMF working paper 22/207, Inflation, IT country, Monetary policy, Monetary policy frameworks, Monetary policy models, Monetary policy paradigm, Natural disasters, Supply and demand shock

Publication Details

Pages:

50
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2022/207
Stock No:

WPIEA2022207
ISBN:

9798400223556
ISSN:

1018-5941

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