Financial instability and climate change: new challenges for central banks

Luiz Henrique Bispo Santos () and Eliane Araujo

Brazilian Journal of Political Economy, 2024, vol. 44, issue 4, 603-619

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.

Keywords: Climate-induced financial instability; central banks; climate change (search for similar items in EconPapers)
Date: 2024
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