Climate change and monetary policy in Latin America and the Caribbean

Climate change poses significant challenges to economic stability, particularly in vulnerable regions such as Latin America and the Caribbean (LAC). This paper examines the macroeconomic and monetary policy implications of climate risks in the region, focusing on both physical and transition risks. Physical risks, including extreme weather events and long-term climate shifts, disrupt productivity, infrastructure, and supply chains, intensifying inflationary pressures and hindering economic growth. Transition risks, driven by the shift to a low-carbon economy, impact key industries and labor markets, while also creating opportunities for green investments and innovation. The study explores how climate change disrupts the traditional monetary policy transmission mechanism, requiring central banks to adapt their frameworks and tools. It emphasizes the crucial role of central banks in integrating climate risks into monetary policy, promoting sustainable finance, and collaborating with fiscal authorities to enhance climate resilience. The findings highlight the importance of robust data collection, policy coordination, and regional cooperation to address these challenges effectively. By tailoring monetary policies to the LAC region’s distinct socio-economic and environmental context, central banks can play a key role in mitigating climate-related disruptions and fostering sustainable growth.