Is central bank resilience vulnerable to climate risks? The role of exchange rate stability and green policies

Farzan Yahya, Chien-Chiang Lee and Pei-Fen Chen

Journal of Asian Economics, 2025, vol. 99, issue C

Abstract: This study provides the first comprehensive empirical investigation into how climate risk undermines central bank resilience—a critical yet understudied dimension of the climate-financial stability nexus. Using panel data from 115 countries (1998–2020) and robust econometric approaches addressing endogeneity, we document that heightened climate vulnerability significantly impairs central bank independence, transparency, and solvency. We uncover a previously unexplored transmission mechanism wherein climate shocks pressure central banks toward exchange rate stabilization, granting them limited operational discretion while eroding institutional transparency. Notably, we identify two potential shields against these detrimental effects: central bank green policies and financial openness. Our heterogeneity analysis reveals striking regional and structural patterns, with central banks in the Americas facing the highest vulnerability globally. The negative impact intensifies in environments characterized by high output volatility, elevated government debt, cultural opacity, low interest rates, and weak democratic institutions. These findings have profound implications for monetary policy frameworks in an era of climate uncertainty and offer actionable guidance for strengthening central bank resilience against escalating environmental threats.

Keywords: Central bank resilience; Climate risk; Institutional independence; Monetary policy; Financial stability; Central bank transparency (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:asieco:v:99:y:2025:i:c:s1049007825000880

DOI: 10.1016/j.asieco.2025.101964

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