Title: The effects of climate change on the natural rate of interest: A critical survey
Abstract: Abstract This survey reviews the literature about the possible impacts of climate change on the natural rate of interest ( r *), an important yardstick for monetary policy. Prima facie, economic, and financial developments can lower r * in scenarios with increasing climate‐related damages and uncertainty that reduce productivity growth and raise precautionary savings. Orderly climate policies have a pivotal role in facilitating the transition to a carbon‐neutral economy and supporting a steady investment flow. We discuss the main models used to simulate the effects of climate change on r * and summarize the outcomes. However, in scenarios that assume innovations and investments induced by transition policies, r * could be affected positively. Overall, the downward effects of climate change on r * can be substantial, even considering the high degree of uncertainty about the outcomes, with tipping points and nonlinear effects aggravating the economic impacts. The downward pressure on r * will further challenge monetary policy in the long run, by limiting its policy space. This article is categorized under: Climate Economics > Economics and Climate Change Assessing Impacts of Climate Change > Evaluating Future Impacts of Climate Change