A tale of two crises

Lilit Popoyan and Paola D’Orazio

Chapter 8 in Central Banking, Monetary Policy and Financial In/Stability, 2025, pp 139-164 from Edward Elgar Publishing

Abstract: The Covid-19 pandemic and the climate crisis pose significant challenges to global economic and financial stability, with implications that intersect in various ways. This analysis delves into the parallels between these crises, examining their transmission mechanisms and impacts on financial stability. Both crises disrupt supply chains, impair economic productivity, and induce financial market volatility. The Covid-19 pandemic disrupts global supply chains and economic activity through lockdown measures, while extreme weather events associated with the climate crisis damage infrastructure and productivity. Both crises also heighten systemic risks within the financial system, exacerbate debt vulnerabilities, and intensify market volatility and credit risks. Despite their differing origins and transmission pathways, both crises prompt similar effects on financial stability, necessitating comprehensive policy responses. Central banks are increasingly tasked with addressing climate-related risks, although challenges persist in integrating these considerations into monetary policy frameworks. Regulatory efforts have intensified globally to mitigate climate-related financial risks, focusing on enhancing market oversight and integrating climate considerations into policy frameworks. However, continual adaptation and refinement of strategies are crucial given the complexities of climate change. Policymakers must prioritise environmental concerns in Covid-19 recovery efforts, advocating for a robust climate-focused financial safeguarding framework alongside fiscal and monetary strategies. Such measures could bolster green markets, facilitate sectoral transitions to sustainability, and mitigate financial risks associated with climate change.

Keywords: Covid-19 pandemic; Financial stability; Transmission mechanisms; Monetary policy (search for similar items in EconPapers)
Date: 2025
ISBN: 9781035302147
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