IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/116522.html
   My bibliography  Save this paper

Response of Inflation to the Climate Stress: Evidence from Azerbaijan

Author

Listed:
  • Yusifzada, Tural

Abstract

This research is the first study that analyzes the effects of climate change-related factors on the inflation environment in Azerbaijan during 2005-2020 and forecasts annual inflation for the 2021-2030 period. For this purpose, considering the possible long-run cointegration relation among variables and limited historical observations, the chain impact of temperature on agricultural producer prices is analyzed through the BVAR model. Additionally, the transition requirements to the effects of green energy on inflation are examined through the exchange rate pass-through. Since the aim of the research is to reveal climate change’s impact on the long-run trend of inflation, the study generates two climate scenarios for the 2021-2030 period and analyzes the inflation difference at the end of the horizon. According to the model results, climate change’s contribution to inflation is expected to be 1.3 percentage points (pp) in the long run with the baseline scenario, where climate-related variables follow their historical trends. On the other hand, climate contribution to inflation is estimated to be 2.2 pp in the worst scenario of climate change, where 1.2 °C additional temperature anomaly deteriorates the trends. The results imply that climate change is not only the determinant of seasonality but the trend of inflation. In light of these results, the paper highlights the importance of a well-developed climate action plan set by the government and monetary incentives for transitioning to a green environment set by the Central Bank of the Republic of Azerbaijan. This research is the first study that analyzes the effects of climate change-related factors on the inflation environment in Azerbaijan during 2005-2020 and forecasts annual inflation for the 2021-2030 period. For this purpose, considering the possible long-run cointegration relation among variables and limited historical observations, the chain impact of temperature on agricultural producer prices is analyzed through the BVAR model. Additionally, the transition requirements to the effects of green energy on inflation are examined through the exchange rate pass-through. Since the aim of the research is to reveal climate change’s impact on the long-run trend of inflation, the study generates two climate scenarios for the 2021-2030 period and analyzes the inflation difference at the end of the horizon. According to the model results, climate change’s contribution to inflation is expected to be 1.3 percentage points (pp) in the long run with the baseline scenario, where climate-related variables follow their historical trends. On the other hand, climate contribution to inflation is estimated to be 2.2 pp in the worst scenario of climate change, where 1.2 °C additional temperature anomaly deteriorates the trends. The results imply that climate change is not only the determinant of seasonality but the trend of inflation. In light of these results, the paper highlights the importance of a well-developed climate action plan set by the government and monetary incentives for transitioning to a green environment set by the Central Bank of the Republic of Azerbaijan.

Suggested Citation

  • Yusifzada, Tural, 2022. "Response of Inflation to the Climate Stress: Evidence from Azerbaijan," MPRA Paper 116522, University Library of Munich, Germany, revised 20 Sep 2022.
    • Handle: RePEc:pra:mprapa:116522
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/116522/1/MPRA_paper_116522.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Corey Lesk & Pedram Rowhani & Navin Ramankutty, 2016. "Influence of extreme weather disasters on global crop production," Nature, Nature, vol. 529(7584), pages 84-87, January.
    2. Sims, Christopher A & Zha, Tao, 1998. "Bayesian Methods for Dynamic Multivariate Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 949-968, November.
    3. Tatyana Deryugina & Solomon M. Hsiang, 2014. "Does the Environment Still Matter? Daily Temperature and Income in the United States," NBER Working Papers 20750, National Bureau of Economic Research, Inc.
    4. Chow, Gregory C & Lin, An-loh, 1971. "Best Linear Unbiased Interpolation, Distribution, and Extrapolation of Time Series by Related Series," The Review of Economics and Statistics, MIT Press, vol. 53(4), pages 372-375, November.
    5. Mohammad Saiful Islam & Kazunobu Okubo & Abu Hayat Md. Saiful Islam & Masayuki Sato, 2022. "Investigating the effect of climate change on food loss and food security in Bangladesh," SN Business & Economics, Springer, vol. 2(1), pages 1-24, January.
    6. LeSage, James P, 1990. "A Comparison of the Forecasting Ability of ECM and VAR Models," The Review of Economics and Statistics, MIT Press, vol. 72(4), pages 664-671, November.
    7. Ferrari, Alessandro & Landi, Valerio Nispi, 2020. "Whatever it takes to save the planet? Central banks and unconventional green policy," Working Paper Series 2500, European Central Bank.
    8. Christophe McGlade & Paul Ekins, 2015. "The geographical distribution of fossil fuels unused when limiting global warming to 2 °C," Nature, Nature, vol. 517(7533), pages 187-190, January.
    9. Emanuele Campiglio & Yannis Dafermos & Pierre Monnin & Josh Ryan-Collins & Guido Schotten & Misa Tanaka, 2018. "Climate change challenges for central banks and financial regulators," Nature Climate Change, Nature, vol. 8(6), pages 462-468, June.
    10. Salaheddine Soummane, Frédéric Ghersi, and Franck Lecocq, 2022. "Structural Transformation Options of the Saudi Economy Under Constraint of Depressed World Oil Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    11. Miles Parker, 2018. "The Impact of Disasters on Inflation," Economics of Disasters and Climate Change, Springer, vol. 2(1), pages 21-48, April.
    12. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Cunpu Li & Xuetong Zhang & Jing He, 2023. "Impact of Climate Change on Inflation in 26 Selected Countries," Sustainability, MDPI, vol. 15(17), pages 1-22, August.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Tao Zha & Kaiji Chen, 2017. "The Asymmetric Transmission of China's Monetary Policy," 2017 Meeting Papers 516, Society for Economic Dynamics.
    2. Drudi, Francesco & Moench, Emanuel & Holthausen, Cornelia & Weber, Pierre-François & Ferrucci, Gianluigi & Setzer, Ralph & Adao, Bernardino & Dées, Stéphane & Alogoskoufis, Spyros & Téllez, Mar Delgad, 2021. "Climate change and monetary policy in the euro area," Occasional Paper Series 271, European Central Bank.
    3. Kaiji Chen & Patrick Higgins & Daniel F. Waggoner & Tao Zha, 2016. "Impacts of Monetary Stimulus on Credit Allocation and the Macroeconomy: Evidence from China," NBER Working Papers 22650, National Bureau of Economic Research, Inc.
    4. Lamperti, Francesco & Bosetti, Valentina & Roventini, Andrea & Tavoni, Massimo & Treibich, Tania, 2021. "Three green financial policies to address climate risks," Journal of Financial Stability, Elsevier, vol. 54(C).
    5. Irene Monasterolo & Nepomuk Dunz & Andrea Mazzocchetti & Régis Gourdel, 2022. "Derisking the low-carbon transition: investors’ reaction to climate policies, decarbonization and distributive effects," Review of Evolutionary Political Economy, Springer, vol. 3(1), pages 31-71, April.
    6. Haroon Mumtaz & Fulvia Marotta, 2023. "Vulnerability to Climate Change: Evidence from a Dynamic Factor Model," Working Papers 961, Queen Mary University of London, School of Economics and Finance.
    7. Leeper, Eric M. & Zha, Tao, 2003. "Modest policy interventions," Journal of Monetary Economics, Elsevier, vol. 50(8), pages 1673-1700, November.
    8. Pieroni, Luca & d'Agostino, Giorgio & Lorusso, Marco, 2008. "Can we declare military Keynesianism dead?," Journal of Policy Modeling, Elsevier, vol. 30(5), pages 675-691.
    9. Margaux MacDonald & Michał Ksawery Popiel, 2020. "Unconventional Monetary Policy in a Small Open Economy," Open Economies Review, Springer, vol. 31(5), pages 1061-1115, November.
    10. Liebich, Lena & Nöh, Lukas & Rutkowski, Felix & Schwarz, Milena, 2020. "Current developments in green finance," Working Papers 05/2020, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung.
    11. Ricco, Giovanni & Callegari, Giovanni & Cimadomo, Jacopo, 2016. "Signals from the government: Policy disagreement and the transmission of fiscal shocks," Journal of Monetary Economics, Elsevier, vol. 82(C), pages 107-118.
    12. repec:zbw:bofrdp:2022_003 is not listed on IDEAS
    13. Jan Philipp Fritsche & Patrick Christian Harms, 2020. "Better off without the Euro? A Structural VAR Assessment of European Monetary Policy," Discussion Papers of DIW Berlin 1907, DIW Berlin, German Institute for Economic Research.
    14. Margaret M. Jacobson & Eric M. Leeper & Bruce Preston, 2019. "Recovery of 1933," NBER Working Papers 25629, National Bureau of Economic Research, Inc.
    15. Stefano Carattini & Suphi Sen, 2019. "Carbon Taxes and Stranded Assets: Evidence from Washington State," CESifo Working Paper Series 7785, CESifo.
    16. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    17. Khaled El Sakty & Mohamed Abdelraouf & Samira Allam, 2023. "How Logistics Performance Reshapes The Movement Of Stocks In The Context Of Climate Change?," Business Logistics in Modern Management, Josip Juraj Strossmayer University of Osijek, Faculty of Economics, Croatia, vol. 23, pages 43-62.
    18. William Oman & Romain Svartzman, 2021. "What Justifies Sustainable Finance Measures? Financial-Economic Interactions and Possible Implications for Policymakers," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 22(03), pages 03-11, May.
    19. Chew Lian Chua & Sarantis Tsiaplias, 2009. "Can consumer sentiment and its components forecast Australian GDP and consumption?," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 28(8), pages 698-711.
    20. Diluiso, Francesca & Annicchiarico, Barbara & Kalkuhl, Matthias & Minx, Jan C., 2021. "Climate actions and macro-financial stability: The role of central banks," Journal of Environmental Economics and Management, Elsevier, vol. 110(C).
    21. Imran H. Shah & Ian Corrick & Abdul Saboor, 2018. "How should Central Banks Respond to Non-neutral Inflation Expectations?," Open Economies Review, Springer, vol. 29(2), pages 321-351, April.

    More about this item

    Keywords

    inflation; climate; fossil fuel; green energy; BVAR; forecasting;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:116522. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.