Climate change affects central banks
Economic Commentaries, News Global warming and its consequences are relevant for central banks as these consequences may conceivably have an impact on both financial stability and monetary policy in the long run. This is the conclusion of Conny Olovsson, PhD in economics, who works in the Riksbank’s Research Division.
Central banks' monetary policy, the primary aim of which is to achieve stable prices, may be affected by climate change in several ways. For example, heat waves and droughts result in greater fluctuations in food prices. Financial stability may also be affected. For example, insurance companies may be affected by financial stress following natural disasters caused by climate change if climate risk has been underestimated.
In light of the potentially large and uncertain effects climate change is expected to have, it is highly justifiable for central banks to make an assessment of the total risk this implies for both financial stability and monetary policy going forward. But counteracting global warming will require a global fiscal policy.
The best contribution central banks can make towards assisting the political system to implement a wise and sustainable policy to benefit the climate is to conduct a successful stabilisation policy for both monetary policy and financial stability.
By Conny Olovsson, PhD in economics, who works in the Riksbank’s Research Division. The Riksbank's Economic Commentaries contain, for instance, short analyses and debate articles. The opinions expressed in Economic Commentaries are those of the authors and are not to be seen as the Riksbank's view.