NEW WORKING PAPER: In this paper, we examine how the European Central Bank (ECB) and the US Federal Reserve (Fed) respond to climate-related shocks and whether the green transition can advance without un-dermining price stability. Using monthly data for 2000–2025 and a time-varying local projection framework, we estimate monetary policy responses to both physical and transition climate risks. We find that monetary-policy responses to climate shocks are highly time-varying and state-de-pendent. While baseline responses are often weak or mixed, the broader evidence shows that phys-ical shocks become more inflation-relevant in later years and in high-inflation or high-risk envi-ronments, generating stronger and more persistent policy responses than transition shocks, espe-cially in the United States (U.S.). In the euro area (EA), the ECB’s response to physical shocks is more heterogeneous across periods and horizons, but becomes more tightening-oriented in recent years and at medium to longer horizons. Transition shocks generate weaker, more delayed, and more heterogeneous responses in both economies. For the ECB, they become more inflation-con-sistent from the mid-2010s onward, whereas for the Fed they remain more cautious and become more clearly inflation-relevant only in the post-COVID environment. Overall, our results show that climate shocks have become an important part of monetary transmission, with policy reactions shaped by institutional mandates, inflation regimes, and macroeconomic conditions.
You are welcome to download, share, or comment on the following working paper:
- Ginn, W., Saadaoui, J., & Salachas, E. (2026). Time-varying and state-dependent monetary policy responses to climate risks: Evidence from the ECB and the Fed. EUI Banking Supervision Policy Working Paper Series 2026/18.