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Weather-related disasters and inflation in the euro area

Author

Listed:
  • Beirne, John
  • Dafermos, Yannis
  • Kriwoluzky, Alexander
  • Renzhi, Nuobu
  • Volz, Ulrich
  • Wittich, Jana

Abstract

This article investigates the impact of weather-related disasters on inflation in the euro area over the period 1996–2021. Using a panel structural vector autoregression approach, we explore whether weather-related disasters have a significant and persistent effect on inflation, as well as the role that demand-side and supply-side channels play as drivers of inflation. We also analyse the heterogeneous effects of inflation on different product categories. Our results suggest that weather-related disasters have a positive, non-persistent effect on inflation. This reflects the prevalence of negative supply shock channels and positive demand shock channels over negative demand shock channels. We also find that weather-related disasters have more pronounced effects on the inflation of product categories that represent a higher proportion of the spending of low-income households, implying that disasters reinforce inflation inequality. Overall, our results suggest that, as the climate crisis deepens, it might become increasingly challenging for the European Central Bank to control inflation and its inequality effects.

Suggested Citation

  • Beirne, John & Dafermos, Yannis & Kriwoluzky, Alexander & Renzhi, Nuobu & Volz, Ulrich & Wittich, Jana, 2024. "Weather-related disasters and inflation in the euro area," Journal of Banking & Finance, Elsevier, vol. 169(C).
    • Handle: RePEc:eee:jbfina:v:169:y:2024:i:c:s0378426624002127
    DOI: 10.1016/j.jbankfin.2024.107298
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    Keywords

    Weather-related disasters; Climate change; Inflation; Monetary policy; European Central Bank;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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