Implications for Monetary Policy on the Effects of Climate Change on Inflation: Evidence from G-20 Countries

This study examines the effects of climate change on inflation in G-20 countries, including central banks that play a leading role in shaping global monetary policies. The analysis is conducted not only for the G-20 as a whole but also for subgroups classified by development level (AE-9, DE-10) and monetary policy regime (IT-12, NIT-7), using the panel Local Projections Method (LPM) with quarterly data from January 1990 to March 2024. Symmetric and asymmetric temperature and precipitation shocks, measured through the Z-score method, are employed to capture the differentiated effects of climate variability. The results show that the impacts of climate shocks on inflation are heterogeneous and depend on development levels, monetary policy regimes, and the nature of shocks. Temperature shocks generate deflationary effects in advanced economies but inflationary effects in developing ones. In contrast, precipitation shocks are mostly insignificant in the short run yet exert deflationary effects in the medium and long run. In inflation-targeting countries, temperature shocks have inflationary effects and precipitation shocks have deflationary effects, whereas both shocks produce deflationary pressures in non-targeting countries. Asymmetric analyses further reveal that positive shocks have more substantial and more persistent impacts than negative ones, indicating the greater inflationary or deflationary risks of extreme climate events. Robustness checks confirm these findings across model specifications, sub-periods, and country samples. The results highlight that climate change constitutes a systematic and long-lasting threat to price stability, especially for developing economies, and complicates the conduct of monetary policy. Accordingly, the study underscores the need for central banks to integrate climate shocks into their policy frameworks, adopt flexible and forward-looking instruments, and enhance coordination with fiscal policies to strengthen macroeconomic resilience.