Weather-related disasters and inflation in the euro area

John Beirne, Yannis Dafermos, Alexander Kriwoluzky, Nuobu Renzhi, Ulrich Volz and Jana Wittich

Journal of Banking & Finance, 2024, vol. 169, issue C

Abstract: This article investigates the impact of weather-related disasters on inflation in the euro area over the period 1996–2021. Using a panel structural vector autoregression approach, we explore whether weather-related disasters have a significant and persistent effect on inflation, as well as the role that demand-side and supply-side channels play as drivers of inflation. We also analyse the heterogeneous effects of inflation on different product categories. Our results suggest that weather-related disasters have a positive, non-persistent effect on inflation. This reflects the prevalence of negative supply shock channels and positive demand shock channels over negative demand shock channels. We also find that weather-related disasters have more pronounced effects on the inflation of product categories that represent a higher proportion of the spending of low-income households, implying that disasters reinforce inflation inequality. Overall, our results suggest that, as the climate crisis deepens, it might become increasingly challenging for the European Central Bank to control inflation and its inequality effects.

Keywords: Weather-related disasters; Climate change; Inflation; Monetary policy; European Central Bank (search for similar items in EconPapers)
JEL-codes: E31 E52 Q54 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:169:y:2024:i:c:s0378426624002127

DOI: 10.1016/j.jbankfin.2024.107298

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