Modelling the impacts of climate change on the global economy: Stagflationary shock looming

In terms of the frequency and scale of global natural disasters, the stormy summer of 2021 is once again proof that climate change is an indisputable reality. The question is how strong the impacts of climate change will be on individual economies, how these effects will be spread over time and how central banks should respond. The currently available views of central banks, international institutions and other research institutions indicate that these institutions have yet to reach a clear conclusion. Our aim is to use our own model simulations of selected climate scenarios to contribute to the answer. These simulations show that the effects of climate change will be stagflationary overall and will need to be addressed by tighter monetary policy. Furthermore, the results of our analyses demonstrate that the choice and timing of global climate policy is decisive for the further development of the impacts of climate change and its associated costs. In the case of timely implementation of global climate policy, a more significant decline in real economic activity can be avoided at the cost of higher inflation in the short term. We also conclude that policymakers need to prepare for the ever increasing effects of climate change. This will mainly involve building a sufficiently broad analytical framework in the form of modelling tools which are capable of capturing the risks arising from climate change.