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Financial instability and climate change: new challenges for central banks

Author

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  • Luiz Henrique Bispo Santos
  • Eliane Cristina Araújo

Abstract

The climate-induced financial instability hypothesis, developed in a context ofgrowing concern about the economic consequences of the environmental crisis, expressespossible imbalances in the monetary and financial sides of the economic system promoted byclimate change. This article aims to make a theoretical analysis and an empirical investigationof this hypothesis. To this end, it was sought: i) describe the channels through which climatechange destabilizes financial systems; ii) identify the main responses of central banks;iii) verify the validity of this hypothesis, using the GMM method in a panel data structureformed by a sample of 90 countries in the period from 2002 to 2020. The results suggest that in recent years, climate change has increased financial volatility, while central banks have remainedcommitted to conventional monetary policies. JEL Classification: E58; Q54; G00.

Suggested Citation

  • Luiz Henrique Bispo Santos & Eliane Cristina Araújo, 2024. "Financial instability and climate change: new challenges for central banks," Brazilian Journal of Political Economy, Center of Political Economy, vol. 44(4), pages 603-619.
    • Handle: RePEc:ekm:repojs:v:44:y:2024:i:4:p:603-619:id:2473
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    More about this item

    Keywords

    Climate-induced financial instability; central banks; climate change;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • G00 - Financial Economics - - General - - - General

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