The effects of climate change on the natural rate of interest: a critical survey

Francesco Mongelli, Wolfgang Pointner and Jan Willem End

No 2744, Working Paper Series from European Central Bank

Abstract: This survey reviews the literature about the impact of climate change on the natural rate of interest (r*), an important yardstick for monetary policy. Economic and financial developments can lower r* in scenarios with increasing climate-related damages and uncertainty that reduce productivity growth and raise precautionary savings. Instead, in scenarios that assume innovations and investments induced by transition policies, r* could be affected positively. Orderly climate policies have a pivotal role by facilitating the transition to a carbon-neutral economy and supporting a steady investment flow. We discuss the main models used to simulate the effects of climate change on r* and summarize the outcomes. The downward effects of climate change on r* can be substantial, even taking into account the high degree of uncertainty about the outcomes. Moreover, the downward pressure on r* will further challenge monetary policy in the long run, by limiting its policy space. JEL Classification: E52, Q54

Keywords: climate change; interest rate; monetary policy; natural rate of interest; social cost of carbon (search for similar items in EconPapers)
Date: 2022-10
New Economics Papers: this item is included in nep-cba, nep-ene and nep-env
Note: 1423663
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20222744

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