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The effects of climate change on the natural rate of interest: a critical survey

Author

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  • Mongelli, Francesco Paolo
  • Pointner, Wolfgang
  • van den End, Jan Willem

Abstract

This survey reviews the literature about the impact of climate change on the natural rate of interest (r*), an important yardstick for monetary policy. Economic and financial developments can lower r* in scenarios with increasing climate-related damages and uncertainty that reduce productivity growth and raise precautionary savings. Instead, in scenarios that assume innovations and investments induced by transition policies, r* could be affected positively. Orderly climate policies have a pivotal role by facilitating the transition to a carbon-neutral economy and supporting a steady investment flow. We discuss the main models used to simulate the effects of climate change on r* and summarize the outcomes. The downward effects of climate change on r* can be substantial, even taking into account the high degree of uncertainty about the outcomes. Moreover, the downward pressure on r* will further challenge monetary policy in the long run, by limiting its policy space. JEL Classification: E52, Q54

Suggested Citation

  • Mongelli, Francesco Paolo & Pointner, Wolfgang & van den End, Jan Willem, 2022. "The effects of climate change on the natural rate of interest: a critical survey," Working Paper Series 2744, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20222744
    Note: 1423663
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    Cited by:

    1. Yasmine van der Straten, 2023. "Flooded House or Underwater Mortgage? The Implications of Climate Change and Adaptation on Housing, Income & Wealth," Tinbergen Institute Discussion Papers 23-014/IV, Tinbergen Institute.
    2. Alexandre Carvalho, 2023. "The euro area natural interest rate – Estimation and importance for monetary policy," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    3. Fischer, Lion & Rapp, Marc Steffen & Zahner, Johannes, 2024. "Central banks sowing the seeds for a green financial sector? NGFS membership and market reactions," IMFS Working Paper Series 198, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).

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    More about this item

    Keywords

    climate change; interest rate; monetary policy; natural rate of interest; social cost of carbon;
    All these keywords.

    JEL classification:

    • 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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