Climate threat and price stability: A case study of Belize

Abstract

AbstractIn recent years, there have been calls for policy makers to do more to fight climate change. Indeed, there are growing concerns that climate could exert a serious detrimental impact on financial stability, and thus the wider economy. Empirically, a limited number of studies have highlighted the inflationary effects of climate‐related variables. This study is an attempt to contribute to this literature. More specifically, the article investigates the dynamic inflationary effect of climate in a case study of Belize. Results derived from quarterly data, over the period 1994–2019, and local linear projections suggest that inflation responds positively and significantly to temperature and rainfall shocks. Further disaggregation of inflation into its subindices reveals that this increase in inflation is mainly driven by the effect of climate on food, alcohol and tobacco, household, hospitality, and other goods and services inflation. The findings remain robust even when accounting for temperature and rainfall deviations from historical means. The results suggest that, while inflation control might not be a core element of monetary policy in Belize, policy makers should be aware that these climate‐related effects may have ramifications for the Belize economy.