Climate change and catastrophes

How climate change affects potential output

ECB Economic Buletin, No. 2023/6

This article considers how climate change will affect potential output – the highest level of production that an economy can sustain over the long run without driving up inflation. Higher temperatures and changing rainfall patterns are likely to negatively affect certain sectors, notably agriculture and tourism, and impair workers’ productivity. The green transition involves the reallocation of capital and labour across businesses and sectors. In the long run, the impact on potential output depends on the success of that reallocation and on the rate of progress of green innovation.

The impact of disasters on inflation

Economics of Disasters and Climate Change, 2(1): 21-48. Also ECB Working Paper no. 1982

This paper studies how disasters affect consumer price inflation. There is a marked heterogeneity in the impact between advanced economies, where the impact is negligible, and developing economies, where the impact can last for several years. There are also differences in the impact by type of disasters, particularly when considering inflation sub-indices. Storms increase food price inflation in the near term, although the effect dissipates within a year. Floods also typically have a short-run impact on inflation. Earthquakes reduce CPI inflation excluding food, housing and energy.

Policy options to reduce the climate insurance protection gap

ECB-EIOPA Discussion Paper, 2023

This discussion paper identifies policy options to tackle the widening climate insurance protection gap – i.e., the uninsured portion of the economic losses caused by climate-related natural disasters – while incentivising adaptation and mitigation in light of the expected increase in the frequency and severity of such events due to climate change. It argues for a ladder approach to natural catastrophe insurance, considering options for: (i) enhancing private insurance and deepening cat bond markets; (ii) developing possible shared resilience solutions between public and private entities at national level; and (iii) identifying risk pooling and diversification opportunities that could be explored at a European level.

Climate change and monetary policy in the euro area

ECB Occasional Paper Series, No. 271, 2021 With: Francesco Drudi, et al.

This paper analyses the implications of climate change for the conduct of monetary policy in the euro area. It first investigates macroeconomic and financial risks stemming from climate change and from policies aimed at climate mitigation and adaptation, as well as the regulatory and fiscal effects of reducing carbon emissions. In this context, it assesses the need to adapt macroeconomic models and the Eurosystem/ECB staff economic projections underlying the monetary policy decisions. It further considers the implications of climate change for the conduct of monetary policy, in particular the implications for the transmission of monetary policy, the natural rate of interest and the correct identification of shocks. Model simulations using the ECB’s New Area-Wide Model (NAWM) illustrate how the interactions of climate change, financial and fiscal fragilities could significantly restrict the ability of monetary policy to respond to standard business cycle fluctuations. The paper concludes with an analysis of a set of potential monetary policy measures to address climate risks, insofar as they are in line with the ECB’s mandate.

Feeling the heat: extreme temperatures and price stability

ECB Working Paper Series, No. 2626, 2021 With: Donata Faccia & Livio Stracca

We contribute to the debate surrounding central banks and climate change by investigating how extreme temperatures affect medium-term inflation, the primary objective of monetary policy. Using panel local projections for 48 advanced and emerging market economies (EMEs), we study the impact of country-specific temperature shocks on a range of prices: consumer prices, including the food and non-food components, producer prices and the GDP deflator. Hot summers increase food price inflation in the near term, especially in EMEs. But over the medium term, the impact across the various price indices tends to be either insignificant or negative. Such effect is largely non-linear, being more significant for larger shocks and at higher absolute temperatures. We also provide simulations from a two-country model to understand the rationale behind the results. Overall, our results suggest that temperature plays a non-negligible role in driving medium-term price developments. Climate change matters for price stability.

The Canterbury rebuild five years on from the Christchurch earthquake

Reserve Bank of New Zealand Bulletin, 79: 1-16, 2016. With: Amy Wood, Ilan Noy.

The economic impact of the Canterbury earthquakes

Reserve Bank of New Zealand Bulletin, 75(3): 13-25, 2012. With: Daan Steenkamp.

Inflation and price setting

How global is “global inflation”?

The Journal of Macroeconomics, 58:174-197, 2018. Also ECB Working Paper no. 2024

Recent research on high-income economies highlights the role of global factors in explaining the variance of inflation. Data availability has until now limited the analysis beyond this small number of economies. Using a comprehensive new dataset of consumer prices for 223 economies, this paper shows that the observed explanatory power of “global inflation” does not extend to middle and low income economies. Moreover, when inflation is split by sub-component, common factors explain a large share of the variance in energy, and to a lesser extent, food prices but not housing or other prices. How global is “global inflation”? Not very.

Price-setting behaviour in New Zealand?

New Zealand Economic Papers, 51(3):217-236, 2017. Also RBNZ Working Paper no. 2014/04

New evidence from a large survey of over 5300 New Zealand firms provides insight into the causes and extent of price rigidity. There is a large degree of heterogeneity between, and within, sectors. The median number of price reviews is twice per year, but the median number of changes is just one. Multi-product firms reset prices more frequently, even accounting for other firm characteristics. Explicit and implicit contracts and strategic complementarity are the most widely recognised causes of price rigidity. Menu costs and sticky information are not widely recognised.

New insights into price‐setting behaviour in the UK: Introduction and survey results

The Economic Journal, 122(558): F1-F15, 2012. Also Bank of England Working Paper no. 395 With: Jennifer Greenslade.

This article introduces the other contributions in this Feature which use individual price data to investigate the extent of pricing rigidities in the UK. It also reports the most relevant results of a new survey of the price‐setting behaviour that we have conducted for the UK, including details about why prices are sticky. The articles consider whether the microdata or survey results are consistent with particular theories of price setting. Our results suggest that there is heterogeneity in price‐setting behaviour, which is ignored in typical ‘representative agent’ models.