Supply and demand shocks induced by climate risks can have a material impact on inflation and growth and induce other macroeconomic effects from spillovers. However, these effects are hard to quantify given uncertainties around timing, magnitude and response functions associated with both physical and transition risks. What is the role of central banks in combating climate change given these challenges? Should the difficulties in measurement and quantification limit needs of regulatory oversight? Should there be a change in the regulatory framework to account for climate risks? Today, approaches of central banks around the world vary on this topic.

Our experts, Rick Lacaille, Ramu Thiagarajan, Simona Mocuta and Hanbin Im outline the macroeconomic risks associated with climate change. They also discuss the challenges associated with estimation of these risks. These uncertainties, in turn, result in limiting the toolkit that can be deployed by central banks in measuring, monitoring and regulating this risk. Our experts provide the contours of a rational approach for central banks to monitor and regulate macroeconomic risks associated with climate risks.