Temperature Change and Central Banks’ Policy: Evidence from the ASEAN+3 Countries

This study investigates the impact of temperature shocks on prices and output for the ASEAN+3 countries, using annual data for the 1990-2023 period. Based on the panel SVAR framework, the empirical evidence indicates that temperature shocks, which can be considered as negative supply shocks, lead to output contraction and cause inflationary pressures. When the sample is split into two subgroups, namely the ten ASEAN countries and the +3 advanced economies, similar findings are derived. These effects seem to be quite persistent as they last for several years after the initial shock. Moreover, the results imply that temperature shocks initiate expansionary fiscal policies, which are of greater magnitude in the case of the +3 economies. For these three countries, a temperature shock also triggers a rather temporary expansionary monetary policy. The discussion that follows indicates that the monetary authorities of the region may have a role to play in dealing with the adverse effects of climate change. The use of new financial tools, such as green bonds and green loans, could be a solution. However, their use should be prudent because of the potential risks they bear.