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Monetary Policymaking under Climate Uncertainty

Author

Listed:
  • Kantur, Zeynep

    (Baskent University)

  • Ozcan, Gulserim

    (Atilim University)

Abstract
The most effective policy to prevent climate change is the decarbonization of the production process. Decarbonization, which should be planned and not delayed, will cause some assets to become idle or stranded, either entirely or partially. Therefore, the transition to a low-carbon economy results in sudden and unexpected fluctuations in asset prices. These shocks will affect the relevant sector and all production sectors with a domino effect and deteriorate financial stability. To the extent that these shocks are predictable, policymakers can prepare for the repercussions of green financial transformation. However, the tools needed to pre-measure them are new and dependent on many economic variables. Therefore, policymakers need a road map to act under this uncertainty. This paper theoretically provides insights into central banks’ role/engagement under climate change ambiguity. The paper shows that the less the central bank trusts its policy model, the higher the sensitivities of inflation, output-gap, and asset price-gap to climate-related shocks. Hence, an aggressive response of monetary policy is required in the face of uncertainty.

Suggested Citation

  • Kantur, Zeynep & Ozcan, Gulserim, 2022. "Monetary Policymaking under Climate Uncertainty," Business and Economics Research Journal, Uludag University, Faculty of Economics and Administrative Sciences, vol. 13(4), pages 579-591, October.
    • Handle: RePEc:ris:buecrj:0612
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    Citations

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    Cited by:

    1. Eisei Ohtaki, 2023. "Climate change, financial intermediation, and monetary policy," Working Papers e179, Tokyo Center for Economic Research.

    More about this item

    Keywords

    Climate Change; Monetary Policy; Financial Stability; New Keynesian Model; Knightian Uncertainty; DSGE Model;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • 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

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