Feeling the heat: extreme temperatures and price stability
Miles Parker and
Livio Stracca ()
No 2626, Working Paper Series from European Central Bank
We contribute to the debate surrounding central banks and climate change by investigating how extreme temperatures aﬀect medium-term inﬂation, the primary objective of monetary policy. Using panel local projections for 48 advanced and emerging market economies (EMEs), we study the impact of country-speciﬁc temperature shocks on a range of prices: consumer prices, including the food and non-food components, producer prices and the GDP deﬂator. Hot summers increase food price inﬂation in the near term, especially in EMEs. But over the medium term, the impact across the various price indices tends to be either insigniﬁcant or negative. Such eﬀect is largely non-linear, being more signiﬁcant for larger shocks and at higher absolute temperatures. We also provide simulations from a two-country model to understand the rationale behind the results. Overall, our results suggest that temperature plays a non-negligible role in driving medium-term price developments. Climate change matters for price stability. JEL Classification: E03, E31, Q51, Q54
Keywords: climate change; extreme temperatures; inflation; panel local projections (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20212626
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