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Climate risk and the natural interest rate: An E-DSGE perspective

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  • Levine, Paul
  • Pontines, Victor

Abstract

We examine the effect of climate-induced temporary extreme weather events on the natural real interest rate by incorporating environmental aspects into a Keynesian growth model. We find that environmental damage accentuates the reduction in the natural real interest rate caused by climate-induced temporary supply disruptions, and this effect is even more pronounced when the estimate of the current stock of carbon dioxide in the atmosphere doubles.

Suggested Citation

  • Levine, Paul & Pontines, Victor, 2024. "Climate risk and the natural interest rate: An E-DSGE perspective," Economics Letters, Elsevier, vol. 238(C).
    • Handle: RePEc:eee:ecolet:v:238:y:2024:i:c:s0165176524002027
    DOI: 10.1016/j.econlet.2024.111719
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    References listed on IDEAS

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    1. Fornaro, Luca & Wolf, Martin, 2023. "The scars of supply shocks: Implications for monetary policy," Journal of Monetary Economics, Elsevier, vol. 140(S), pages 18-36.
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    3. Fischer, Carolyn & Springborn, Michael, 2011. "Emissions targets and the real business cycle: Intensity targets versus caps or taxes," Journal of Environmental Economics and Management, Elsevier, vol. 62(3), pages 352-366.
    4. Annicchiarico, Barbara & Di Dio, Fabio, 2015. "Environmental policy and macroeconomic dynamics in a new Keynesian model," Journal of Environmental Economics and Management, Elsevier, vol. 69(C), pages 1-21.
    5. Stefano Carattini & Garth Heutel & Givi Melkadze, 2023. "Climate Policy, Financial Frictions, and Transition Risk," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 778-794, December.
    6. Nordhaus, William D, 1993. "Optimal Greenhouse-Gas Reductions and Tax Policy in the "Dice" Model," American Economic Review, American Economic Association, vol. 83(2), pages 313-317, May.
    7. Annicchiarico, Barbara & Di Dio, Fabio & Diluiso, Francesca, 2024. "Climate actions, market beliefs, and monetary policy," Journal of Economic Behavior & Organization, Elsevier, vol. 218(C), pages 176-208.
    8. Gibson, John & Heutel, Garth, 2023. "Pollution and labor market search externalities over the business cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 151(C).
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    Cited by:

    1. Zhang, Jing & Lin, Xiaole & An, Qiguang, 2026. "Dynamic response of the natural interest rate to extreme climate," Research in International Business and Finance, Elsevier, vol. 81(C).
    2. Shah, Sayar Ahmad & Garg, Bhavesh & Sahoo, Pravakar, 2025. "Identifying efficient policy mix under emission mitigation and inflation targeting: A case of India," Energy Economics, Elsevier, vol. 150(C).
    3. Li, Yi & Zhou, Bing, 2026. "Research on the impact of extreme climate on financial asset price —based on the DSGE model," International Review of Economics & Finance, Elsevier, vol. 105(C).

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    Keywords

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    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • O42 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models
    • O44 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Environment and Growth

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