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Climate change and central banks: Introducing the expectations channel

Climate change and central banks: Introducing the expectations channel

Climate change has emerged as a major challenge for central banks, although its extent and the immediate consequences are highly uncertain. This column uses a survey of over 10,000 US consumers to show that irrespective of when and how climate change actually plays out, what matters for monetary policy is how people expect it to play out. Central bankers ignore the expectations channel of climate change at their peril.

Climate change has emerged as a major challenge for central banks. On the one hand, there is a debate about appropriate actions of central banks to limit climate change. In this regard, the ECB has taken a leading role, recognising that the “urgency of this topic… requires all policymakers to explore their roles in tackling this challenge” (Schnabel 2021) and noting that while “we are not in the driving seat”, this “does not mean that we can simply ignore climate change, or that we do not play a role in combating it” (Lagarde 2021). On the other hand, it is widely accepted that climate change matters for monetary policy, at least to the extent that it gives rise to financial stability risks (Brunnermeier and Landau 2020).

Measuring expectations about the near-term economic impact of climate change

Against the background of these far-reaching and fundamental considerations, we show in a new paper that climate change represents a much more direct and immediate challenge for monetary policy (Dietrich et al. 2021). Our point of departure is the fact that irrespective of when and how climate change actually plays out, what matters for monetary policy is how people expect it to play out.

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