Climate change and climate policies can affect all of these mandates, as they may have an impact on macroeconomic and financial variables such as output, inflation, interest rates and asset prices, while altering the underlying structure of our economies. It is therefore essential for central banks to gain a full understanding of these repercussions for the functioning of the economy and the financial system.
We need to embed climate-related developments and risks in our analyses and update our analytical and forecasting toolkits accordingly. Regarding the impact on the financial system and the economy, climate change entails both physical and transition risks. First, physical risks result from persistent changes in climate and more frequent extreme weather events. Goethe himself experienced first-hand the enormous impact extreme weather can have.