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

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 effects of climate change on international commodity prices (food, energy, and fertilisers) from 1961 to 2020. The study employs a Bayesian Vector Autoregression (BVAR) model identified with sign restrictions. First, this study finds that climate change causes an increase in commodity prices, with the effect being greatest for energy, followed by fertilisers, and least for food prices. Second, this study also finds that climate change may have amplified 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 findings of global climate change's positive effects on commodity prices and a negative impact on global real GDP, suggests that monetary authorities may face higher inflation-output trade-off. 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.