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Journal of Banking & Finance Vol. 169 2024

Weather-related disasters and inflation in the euro area

John Beirne1,2; Yannis Dafermos3,4; Alexander Kriwoluzky5,6; Nuobu Renzhi7; Ulrich Volz3,8,4,9,10; Jana Wittich5,6

1 Asian Institute of Management · 2 Asian Development Bank · 3 University of London · 4 SOAS University of London · 5 German Institute for Economic Research · 6 Freie Universität Berlin · 7 Capital University of Economics and Business · 8 German Institute of Development and Sustainability · 9 Centre for Economic Policy Research · 10 London School of Economics and Political Science

Abstract

This article investigates the impact of weather-related disasters on inflation in the euro area over the period 1996–2021. Using a panel structural vector autoregression approach, we explore whether weather-related disasters have a significant and persistent effect on inflation, as well as the role that demand-side and supply-side channels play as drivers of inflation. We also analyse the heterogeneous effects of inflation on different product categories. Our results suggest that weather-related disasters have a positive, non-persistent effect on inflation. This reflects the prevalence of negative supply shock channels and positive demand shock channels over negative demand shock channels. We also find that weather-related disasters have more pronounced effects on the inflation of product categories that represent a higher proportion of the spending of low-income households, implying that disasters reinforce inflation inequality. Overall, our results suggest that, as the climate crisis deepens, it might become increasingly challenging for the European Central Bank to control inflation and its inequality effects.

DOI
10.1016/j.jbankfin.2024.107298
Volume
169
Pages
107298
Language
en
Sources
crossref bibtex:phds-export.bib openalex

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