Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/278219 
Year of Publication: 
2022
Series/Report no.: 
ECB Working Paper No. 2744
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
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
Subjects: 
interest rate
monetary policy
climate change
natural rate of interest
social cost of carbon
JEL: 
E52
Q54
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-5392-4
Document Type: 
Working Paper

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