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The temperature-induced monetary stress in the euro area

Author

Listed:
  • Hamza Bennani

    (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Nantes Univ - IAE Nantes - Nantes Université - Institut d'Administration des Entreprises - Nantes - Nantes Université - pôle Sociétés - Nantes Univ - Nantes Université)

  • Etienne Farvaque

    (IESEG - UCL - Université catholique de Lille, Université de Lille)

Abstract

Climate change, through temperature anomalies, is likely to have an asymmetric effect on prices and economic activity within the euro area. In this paper, we aim to measure the monetary stress for each member country resulting from these asymmetric shocks. For that purpose, we first measure how inflation and GDP per capita respond to temperature anomalies in several euro area countries. As a second step, we simulate the temperature-induced changes in inflation and GDP per capita over the period 2025-2100. The significant divergences in these temperature-induced variables call for different monetary policy needs within the currency union, hence the existence of a temperature-induced monetary stress that is likely to worsen over time. Our results provide evidence that climate change constitutes a challenge to the sustainability of the currency union and to the one size fits all ECB's policy.

Suggested Citation

  • Hamza Bennani & Etienne Farvaque, 2024. "The temperature-induced monetary stress in the euro area," Working Papers hal-04388617, HAL.
    • Handle: RePEc:hal:wpaper:hal-04388617
    Note: View the original document on HAL open archive server: https://hal.science/hal-04388617
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