Maybe It’s Not Time to Blend Monetary Policy with Climate Policy
Experts cast doubt on the connection between climate change and central banking.
- By
- August 14, 2025
- CBR - Monetary Policy
The Network of Central Banks and Supervisors for Greening the Financial System, a grouping of central banks and financial regulators that aims to help manage climate risk to the financial system and, according to its website, “mobilize mainstream finance to support the transition toward a sustainable economy,” had just eight members when it was formed in 2017. Today it boasts more than 160 members and observers, ranging from large global players such as the European Central Bank, the People’s Bank of China, and the Bank of Japan to relative minnows such as the central banks of Serbia and Seychelles.
One notable absence is the US Federal Reserve, which left the NGFS this past January.
While few economists would dispute that climate change is a major global issue and one that will have major economic implications over the coming decades, its relevance to monetary policy—at least in the short run—is far less clear.
The NGFS argues that “climate change is not a distant threat—it is a current reality reshaping our economies and financial systems. Understanding the immediate impact of climate-related risks has thus become an urgent necessity for central banks and other financial actors.”
Many finance experts are not sold on the connection between climate change and central banking, however. In May, Chicago Booth’s Kent A. Clark Center for Global Markets polled its panel of finance scholars about the near-term relevance of climate change’s physical risks to monetary policy and financial stability. On the whole, the panel was unconvinced that climate risk will be a major concern of central banks in the immediate future.
The panel was first asked whether “under current policies on climate change, the associated physical risks (such as those arising from total seasonal rainfall and sea level changes, and increased frequency, severity, and correlation of extreme weather events) will be at most a very small factor in monetary policy decisions over the next decade.” Weighted by confidence, 52 percent of respondents either strongly agreed or agreed, while 33 percent were uncertain. Just 15 percent of respondents disagreed.
The climate is likely to remain a major policy focus overall, but perhaps not a major concern of central bankers.
Stanford’s John H. Cochrane, who strongly agreed that climate risks would likely be a small factor when it comes to monetary policy in the coming decade, argued that, “You have to have a very expansive view of monetary policy and technocratic capacity (with 10 percent inflation in the rearview mirror) to draw a connection between the overnight federal funds rate and slow-moving CO2-related changes in the probability distribution of the weather.”
Of course, much depends on exactly how materially the impacts of climate change begin to show up in the next 10 years. As Duke’s Campbell R. Harvey put it, “while climate plays little or no role in current policy, the question is about the next decade. If the frequency of extreme events continues to increase, it is plausible that there could be systemic events that become more than a ‘small factor in monetary policy.’”
And as Janice Eberly of Northwestern noted, if climate risks do materialize in the form of an economic shock, one would expect policy to respond. “Even if policy does not explicitly target climate risks, those risks may appear as economic shocks. Monetary policy has responded strongly to external shocks, such as the pandemic, when they are large enough, regardless of origin.”
Nor were the experts convinced of the relevance of climate change to financial stability, although on that point the consensus was weaker. Asked whether “the physical risks associated with climate change under current policies are likely to threaten financial stability over the next decade,” 47 percent of respondents (again weighted by confidence) either strongly disagreed or disagreed, while 38 percent were uncertain.
Some respondents noted that even if actual changes in weather patterns don’t threaten financial stability, climate policies could. Chicago Booth’s Anil K Kashyap argued, “The transition risks from policies that change the price of carbon are a VERY different matter, and those could create lots of stranded assets.”
MIT’s Jonathan Parker made the distinction that even if overall financial stability was unlikely to be threatened by climate risks, individual institutions might still be in some danger. “Under the types of regulatory policies that we’ve seen in the past decade, our financial sector is well protected against climate disasters. But not all institutions are safe. Insurers face significant risk.”
The panel’s views on the impact of climate change on monetary policy are similar to those expressed by the Clark Center’s US Economic Experts Panel, which was asked similar questions in 2019—though that group was, five and a half years ago, a touch more concerned about the financial-stability risks.
As one respondent put it then, the risks are more likely to materialize “not over the next decade, but within two or three decades.” Until then, the climate is likely to remain a major policy focus overall, but perhaps not a major concern of central bankers.
Duncan Weldon is an economist, journalist, and author who regularly writes for the Financial Times, the New Statesman, and other publications. This is an edited version of a column that ran on the Clark Center’s website.
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