Climate change’s impact on commodity prices: a new challenge for monetary policy

Abstract

Climate change is a global issue that is driving up commodity prices such as food, energy and fertiliser. In this light, this study examines the efects of climate change on international commodity prices (food, energy, and fertilisers) from 1961 to 2020. The study employs a Bayesian Vector Autoregression (BVAR) model identifed with sign restrictions. First, this study fnds that climate change causes an increase in commodity prices, with the efect being greatest for energy, followed by fertilisers, and least for food prices. Second, this study also fnds that climate change may have amplifed the short-run impact of fertiliser and energy prices on food prices. Third, the estimates suggest that climate change may have a negative impact on global real GDP. Overall, this study’s fndings of global climate change’s positive efects on commodity prices and a negative impact on global real GDP, suggests that monetary authorities may face higher infation-output trade-of. Hence, this study argues that climate change may be a new challenge to monetary policy strategy, particularly in countries that are net importers of staple foods and have a large share of food items in their consumer price index.