The role of central banks in combating climate change: The case of emerging markets and Türkiye

Scientific studies and international reports have confirmed that global warming is driven by human activities. The increase in greenhouse gas emissions due to these activities has triggered unprecedented global warming, thereby accelerating climate change. The physical and transition risks resulting from climate change create profound and complex impacts on the economy. These risks are expected to have significant implications for central banks and the monetary policies they implement, mediated through the financial system and the macroeconomy. Accordingly, climate-related risks are recognized as a sources of financial risk and are anticipated to have adverse effects on price stability. Simultaneously, these risks are expected to weaken the effectiveness of traditional monetary policy tools by constraining monetary transmission channels, thereby undermining the success of monetary policy. Therefore, due to their direct impact on the main objectives of central banks—price stability and financial stability—climate-related risks have become a matter of great importance for central banks. In this context, it has become inevitable for central banks to increase their attention to climate-related risks, and in recent years, intense debates have emerged regarding the roles that central banks can assume in combating climate change. The aim of this study, which examines the relationship between climate change and central banking, is to investigate the impact of climate change on price stability, which is the primary objective of most central banks. To this end, the effects of climate change indicators on consumer inflation in emerging market economies for the period 2000-2018 have been analyzed using the Driscoll-Kraay robust estimator method. Additionally, for the case of Türkiye, the long-run effects of climate change indicators on food and consumer inflation for the period 1990-2021 have been examined using the ARDL bounds testing approach, while the causal relationships between the variables have been analyzed with the Toda-Yamamoto causality test. Unlike previous studies in the literature, climate change indices have been developed to represent climate change specifically for emerging market economies and the case of Türkiye. The findings suggest that climate change exerts inflationary pressures. Accordingly, climate change poses a threat to price stability, which is the main objective of central banks. Therefore, central banks should consider climate-related risks within the framework of the monetary policies they implement to ensure price stability.