The Macroeconomic Implications of Climate Change for Central Banks

Climate change is one of the most significant issues affecting the global economy. As a small open economy, Ireland is particularly vulnerable to economic spillovers from the international impact of climate-related risks. In recognition of the potential of these risks to affect their ability to maintain both price and financial stability, many central banks, including the Central Bank of Ireland, have started to embed these risks in their analytical and modelling frameworks. In this Article, we explore the key challenges presented by climate change for central banks. We first examine the economic implications of the risks associated with continuing climate change and abrupt mitigatory actions. We then review how these risks could affect the transmission of monetary policy through conventional channels. Finally, we discuss how the Central Bank’s analytical framework needs to adapt and suggest that a suite-of-models approach offers the most practical and effective way of addressing these issues.