Financial instability and climate change: new challenges for central banks

Abstract

ABSTRACT The climate-induced financial instability hypothesis, developed in a context of growing concern about the economic consequences of the environmental crisis, expresses possible imbalances in the monetary and financial sides of the economic system promoted by climate change. This article aims to make a theoretical analysis and an empirical investigation of this hypothesis. To this end, it was sought: i) describe the channels through which climate change 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 structure formed 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 remained committed to conventional monetary policies.

Keywords

• Climate-induced financial instability
• central banks
• climate change