Evaluating the global impact of climate change on agricultural inflation: an innovative climate condition index approach

Tural Yusifzada

Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, 2024, vol. 26, issue 7, No 81, 18438 pages

Abstract: Abstract This research discusses the impact of climate change on inflation, as well as the limitations of existing econometric models in incorporating multiple climate-related variables in determining inflation. To address this limitation, the study introduces the climate condition index (CCI) for 153 countries covering the 1901–2021 period to investigate the relationship between climate and agricultural inflation. This index represents a weighted average of various climate variables, including cloud coverage, temperature, precipitation, vapor pressure, and wet day frequency. The weights are the long-term cointegration coefficients of the climate variables concerning the Agricultural Producer Price Index (APPI), which were obtained from separate vector error correction models (VECMs) constructed for each country. The study shows that climate change has a significant impact on agricultural prices globally, as evidenced by a median Granger causality p-value of 0.036 across 153 countries (CCI Granger causing APPI in 127 countries with a 90% confidence interval). The results align with panel vector autoregression and country-specific VECMs impulse responses, which indicate that climate conditions negatively impact agriculture in 142 countries, while 11 countries gain from climate change. The study's overall results suggest that climate change substantially affects agriculture globally. In light of the significant economic reliance on agricultural production, it is advisable for governments to consider the issue from the perspective of sustainable growth, while central banks should tackle it with a focus on the inflationary implications through green quantitative easing.

Keywords: Inflation; Climate change; Agriculture; Global climate index; Vector error correction model (VECM); Panel vector autoregression (PVAR) (search for similar items in EconPapers)
JEL-codes: C32 E31 E37 F01 Q54 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10668-023-03394-8

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