Climate change: implications for the macroeconomics


What are the implications of climate change and climate change related policies on the macroeconomics in general and monetary policy in particular? This is the key question debated at a recent symposium on “Climate Change: Implications for Macroeconomics” hosted by the New York Fed’s Applied Macroeconomics and Econometrics Center (AMEC) on May 13. This post briefly summarizes the content of the discussion and provides links to the recordings of the various sessions and the slides of the participants.

The Symposium

The objective of the symposium was to have an open and lively discussion on the subject of climate change and its implications for macroeconomic policy. A group of academics and policy makers discussed and debated key topics divided into four sessions: (1) the implications of climate change for monetary policy; (2) understand the macroeconomic impacts (including distributional implications) of the reallocation of labor and capital across sectors and geographies that may arise as a result of climate change and climate policies; (3) examine the effect of climate policy on the global supply chain and the corresponding implications for monetary policy; and (4) understand the impact on financial markets of uncertainty associated with climate change and climate policies and the corresponding effects on the macroeconomy.

Implications of climate change for monetary policy

The first session focused on macroeconomics. James Stock from Harvard University discussed the implications of climate change for monetary policy (slides). The essence of his presentation was that climate change and the policies designed to deal with it will be an important source of risks for macroeconomic management. Some of these risks stem from physical disturbances caused by climate-related events such as hurricanes or heat waves, but many stem from the effects of so-called transition policies, i.e. policies intended to combat climate change. climate change, such as a carbon tax. Professor Stock then provided empirical evidence on some of these risks, using studies that analyze the impact of carbon taxes, climate policy uncertainty and energy prices on real activity and the economy. ‘inflation.

Iván Werning of MIT also developed the implications of transition risks for macroeconomics (slides). Werning first discussed the effects of energy price shocks – such as those the US economy is currently experiencing – in any economy where real wages do not adjust quickly, as in the work of Blanchard and Galí , and pointed out that in such an economy, these shocks are akin to cost-push shocks, which have inflationary effects. He then covered the topic of monetary policy in times of structural reallocation, borrowing from his work with Guerrieri, Lorenzoni and Straub, and argued that monetary policy may want to allow some inflation in order to facilitate the adjustment of real wages and reallocation across sectors.

Reallocation of labor and capital and climate change

Our second session focused on the implications of climate for the reallocation of labor and capital. Our first speaker, Daron Acemoglu of MIT, highlighted the need to improve energy efficiency, but also noted that the transition can be more or less difficult for certain “tasks” (slides). For example, there have been tremendous advances in renewable energy, especially solar and wind. He noted that part of the reason for the success of renewables was the price of alternatives: when alternative energy sources were expensive, investments in green technologies increased and vice versa. This suggests that any effort to make gas cheaper will hinder advances in green energy technology. In terms of the effect on the workforce, Acemoglu said that while it is possible that a full transition to clean energy could be very costly, many manufacturing companies have already switched to clean energy and only 40 000 workers are currently employed in coal. Finally, Acemoglu argued that with standard discounting, welfare calculations based on utility maximization would imply that any climate damage a hundred years from now would not matter, and he argued for an alternative method to reflect on the need for macroeconomic policy.

Our next speaker was Tatyana Deryugina of the University of Illinois at Urbana-Champaign. Professor Deryugina described the effects of climate change on the spatial distribution of labor (slides). First, she noted that there are many opportunities for labor mobility in the United States; nearly 40% of individuals live in places different from their place of birth. Insofar as the climate will modify the distribution of productivity in space, these changes can be capitalized by the mobility of labour. However, she also pointed out that people seem to move around in suboptimal ways; for example, Professor Deryugina cited his work on Hurricane Katrina, which demonstrated that those who had to move because of the hurricane ended up earning more after leaving New Orleans than those who stayed. She commented that this begs the question: why didn’t they leave in the first place? Finally, she stressed that understanding why this sub-optimal mobility is present (lack of information or social networks, for example) will be key to implementing mobility-friendly policies.

Climate change, trade and global production

The third session focused on the global implications of climate change. Session speakers discussed how climate change can alter economic activity within, across and between countries, and explored the associated implications for economic growth. The first speaker, Solomon Hsiang from the University of California, Berkeley, presented evidence of the impact of temperature change on economic growth in countries, using historical data (slides). While temperature changes have been gradual, Hsiang showed that small changes will have a dramatic impact on the world. He then turned his attention to discussing the complexity of deriving precise distributions of potential climatic events.

The second speaker, Esteban Rossi-Hansberg from the University of Chicago, spoke about the importance of adaptation to climate change (slides). His presentation focused on the heterogeneous impacts of climate change across places, involving winners and losers. Its quantitative modeling highlighted the need for a spatial reallocation of economic activity and the associated costs and benefits. Rossi-Hansberg argued for the need for richer general equilibrium macroeconomic models of climate change so that we can better quantify the impact and policies associated with climate change.

Climate uncertainty and financial markets

The fourth and final session focused on uncertainty related to climate change and financial markets. Lars Peter Hansen from the University of Chicago discussed the policy challenges posed by the uncertainty of climate change (slides). He argued that historical measures based on past climate change have limited value and that policies not backed by credible quantitative modeling could harm the reputation of central banks. He postulated that decision theory under uncertainty offers good insights into how to discuss and classify our discussions, as it allows for a broad perspective on uncertainty and includes dynamic and recursive formulations. As an example of ambiguity, Professor Hansen pointed to the divergent predictions of climate models – considering 144 models, he pointed to considerable divergence between the models and said that it is not clear how to weigh these different models to obtain a probability distribution of the effect. Discussing the greening of portfolios, he pointed out that while some research shows the benefit of a green policy, there is also research that shows the benefit of doing otherwise.

Monika Piazzesi discussed the role of financial markets in the transition to net zero (slides), which refers to a state where an equal amount of carbon dioxide is removed from the atmosphere and released. She began her presentation by highlighting the massive shift in asset purchases with the increasing share of ESG (environmental, social and governance) investments. Focusing on the European Central Bank portfolio, she pointed out that it was quite different from the European market portfolio. The ECB tends to buy bonds for higher-emitting manufacturing sectors, thereby directing its bond buying towards the dirtiest sectors. The ECB portfolio also has a lower share of services compared to the European market portfolio, while the services sector has low carbon emissions. In the context of a growth model with climate externalities and financial frictions, she argued that central bank purchases cannot be market neutral, implying that when central banks intervene, it there will be an effect on the allocation of capital and the price of risk in the market. Thus, it is important to understand which direction central bank buying is leaning, green versus brown.

In summary, the symposium explored some of the ways in which climate change has important implications for macroeconomics and monetary policy, and therefore policymakers want to consider climate change when thinking about policy in the coming decades.

Photo: portrait of Rajashri Chikrabarti

Rajashri Chakrabarti is Head of Equitable Growth Studies in the Research and Statistics Group at the Federal Reserve Bank of New York.

Photo: portrait of Marco Del Negro

Marco Del Negro is an economic research advisor on macroeconomic and monetary studies in the Research and Statistics Group at the Federal Reserve Bank of New York.

Photo: portrait of Julian Di Giovanni

Julian di Giovanni is responsible for climate risk studies in the Research and Statistics Group at the Federal Reserve Bank of New York.

Laura Pilossoph is assistant professor of economics at Duke University.

How to cite this article:
Rajashri Chakrabarti, Marco Del Negro, Julian di Giovanni and Laura Pilossoph, “Climate Change: Implications for Macroeconomics”, Federal Reserve Bank of New York Economy of Liberty StreetJuly 7, 2022,

The opinions expressed in this article are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.


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