Year: 2023
Type: article
Abstract: This survey reviews the literature about the possible impacts of climate change on the natural rate of interest (r*), an important yardstick for monetary policy. Prima facie, economic, and financial developments can lower r* in scenarios with increasing climate‐related damages and uncertainty that reduce productivity growth and raise precautionary savings. Orderly climate policies have a pivotal role in 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. However, in scenarios that assume innovations and investments induced by transition policies, r* could be affected positively. Overall, the downward effects of climate change on r* can be substantial, even considering the high degree of uncertainty about the outcomes, with tipping points and nonlinear effects aggravating the economic impacts. The downward pressure on r* will further challenge monetary policy in the long run, by limiting its policy space. This article is categorized under: Climate Economics > Economics and Climate Change Assessing Impacts of Climate Change > Evaluating Future Impacts of Climate Change
DOI: 10.1002/wcc.873
Language: English
Subfield: Economics and Econometrics
Domain: Social Sciences
SDG: Climate action
Open Access status: hybrid
Estimated APC paid: $4,940
OpenAlex ID: W4389904111