Macroeconomic Effects of Climate Change in an Aging World
IMF Working Papers, December 16, 2022
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Bibliographic details
- Authors: Vimal V Thakoor, Engin Kara
- Published: December 16, 2022
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400226397.001
Summary
- The paper examines three simultaneous long-term trends in a common framework: global population aging; increasing frequency and severity of weather-related disasters; and lowering productivity due to climate change.
- Simulation results suggest that while aging drags down the real interest rate, climate change puts upward pressure on the real interest rate and inflation.
- As climate change intensifies, it becomes the dominant factor shaping macroeconomic variables, resulting in higher inflation and a higher debt-to-GDP ratio, and requiring tighter fiscal and monetary policies.
- Economic uncertainty induced by climate change amplifies these effects.
Key findings and projections (from simulations)
- Aging → downward pressure on the real interest rate.
- Climate change → upward pressure on the real interest rate.
- Climate change → upward pressure on inflation.
- Intensifying climate change → becomes the dominant factor for macroeconomic outcomes.
- Intensifying climate change → higher inflation and higher debt-to-GDP ratio.
- Economic uncertainty from climate change → amplification of the macroeconomic effects of climate change.
Policy implications and recommendations
- Tighter fiscal policy is required in response to higher debt-to-GDP ratios driven by climate change.
- Tighter monetary policy is required in response to higher inflation driven by climate change.
- Policymakers should account for the interaction between demographic trends (aging) and climate-driven shocks when designing macroeconomic policy.
Analytical approach
- Uses a common simulation framework to analyze the joint macroeconomic effects of demographic aging, weather-related disaster frequency/severity, and productivity declines associated with climate change.
- Focuses on macroeconomic variables including the real interest rate, inflation, and the debt-to-GDP ratio.
- Emphasizes the role of economic uncertainty induced by climate change in amplifying simulated outcomes.
IMF Working Paper — "Macroeconomic Effects of Climate Change in an Aging World" (Vimal V Thakoor, Engin Kara), December 16, 2022.
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