The Impacts of Extreme Weather Events on Inflation and the Implications for Monetary Policy in Africa
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Date
2022
Journal Title
Journal ISSN
Volume Title
Publisher
Progress in Development Studies
Abstract
Economic debates around mitigating climate change and weather-related events have
long centred on fiscal policy tools than those of monetary policy. However, recent discussions point
out that monetary policy formulation could also be affected and hence the need to deploy monetary
policy tools as well. Our article seeks to investigate the impacts of climate change, particularly
extreme weather events, on headline inflation and food price inflation and their apparent implications for monetary policy in Africa over the period 1990–2017. Using a two-step dynamic system
With a generalized method of Moments estimation strategy with robust standard errors, we find that
weather-related events may need to be large and consequential to cause a significant price hike in
Africa. We also find the incidence of droughts and floods to have a bearing on food price inflation.
Furthermore, our empirical evidence using mediation analysis reveals agricultural production to
be the critical mechanism whereby extreme weather events affect headline inflation. As central
banks are charged with the mandate of ensuring a stable monetary environment, We suggest thatmonetary policy authorities consider the short- and long-term impacts of supply shocks caused by
extreme weather events on general price levels in their policy formulation.
Description
Research Article
Keywords
Extreme weather events, headline inflation, food inflation