Climate change and monetary policy: some takeaways

Transcript:Climate change and monetary policy: some takeaways:
Climate change and monetary policy: some takeaways from the ECB’s strategy review Bruegel Cornelia Holthausen (ECB) 13 October 2021 Climate change featured prominently in the ECB Strategy review 2 ECB-UNRESTRICTED Outline of presentation 3 3 ECB-UNRESTRICTED Why should the ECB care about climate change? 1 4 ECB-UNRESTRICTED The impact of climate change is increasingly evident 5 Source: Met Office Hadley Centre. Notes: Temperature anomalies are shown compared with the pre-industrial period between 1850 and 1899. Global and European temperatures (degrees Celsius difference compared with pre-industrial levels) Extreme natural events (number and percentage of total events) Source: Munich Re. Notes: Geophysical events: earthquakes, tsunamis, volcanic eruptions; climatological events: heatwaves, cold spells, droughts, wildfires; meteorological events: storms; hydrological events: floods. ECB-UNRESTRICTED Why does the ECB care? 6 Reasons for the ECB to act: Climate change and policies affect the outlook for price stability through their impact on macroeconomic indicators, financial stability, and the transmission of monetary policy. Climate change and policies affect the value and the risk profile of the assets held on the Eurosystem’s balance sheet. "Without prejudice to the objective of price stability", the Eurosystem “shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union“ (Art. 127). ECB-UNRESTRICTED Challenges for data availability and modelling 7 Need for a better understanding by the Eurosystem of the impact of climate change on the macroeconomy, the implications on monetary policy, the risks to the financial system, and the costs of insufficient policies. Increasing data availability, such as more comprehensive information on carbon emissions and the climate exposures of banks and debtors Revising central banks’ macro models and macro staff projections. Key challenges: long-term nature of climate change, non-linearities, heterogeneities across sectors, regions, explicit role of energy sector, climate policies. ECB-UNRESTRICTED Implications for the conduct of monetary policy 2 8 ECB-UNRESTRICTED Climate change and monetary policy transmission 9 ECB-UNRESTRICTED Potential implications for the design of the monetary policy strategy 10 1. Sustained impact of transition policies on inflation volatility, possible underlying trend:  May call for a re-examination of the role of headline vs. core inflation and/or for a lengthening of the medium-term horizon But the challenges for monetary policy would be contained in an orderly transition 2. Higher probability of hitting the ELB due to lower r*, more frequent negative demand shocks, less effective transmission  Strengthen the case for