Climate Change and the Macro-Economy: A Critical Review

50 Pages Posted: 18 Jan 2018

Date Written: January 12, 2018

Abstract

Climatic factors can directly affect economic outcomes such as output, investment and productivity, and understanding the economic consequences of climate change is becoming a necessity not just for climate economists but also for a wider range of economic professionals involved in modelling and forecasting macroeconomic variables. The focus of this review is on the key theoretical and empirical modelling issues in the analysis of the macroeconomic risks deriving from climate change. The paper develops the taxonomy introduced by a number of previous Bank of England studies, which distinguish between physical and transition risks of climate change. The paper then identifies the different channels through which these risks are transmitted to the macro-economy, either through (unpredictable) economic shocks or through predictable, longer-term impacts. The different approaches to modelling these macroeconomic effects are then discussed and assessed in light of the increasing need to routinely monitor and quantify the impact of emerging climate change risks on the economy.

Keywords: climate change, global warming, natural disasters, macroeconomic models

JEL Classification: E10, H23, Q51, Q54, Q56

Suggested Citation

Batten, Sandra, Climate Change and the Macro-Economy: A Critical Review (January 12, 2018). Bank of England Working Paper No. 706, Available at SSRN: https://ssrn.com/abstract=3104554 or http://dx.doi.org/10.2139/ssrn.3104554

Sandra Batten (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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