Central Banking Challenges Posed by Uncertain Climate Change and Natural Disasters

Lars Peter Hansen

Key Takeaways:

• Policymakers are working to mitigate the negative effects of climate change. For fiscal policy, this means such proposals as carbon taxes, or the creation of markets in production licenses.
• Some observers are calling for monetary policy to take a more active role, but dangers loom, including risks to central bank independence.
• Some of the most salient negative effects of climate change will likely occur 30 years from now and even further out.
• Current scenario-based stress tests that central banks use to determine the future viability of financial institutions are not equipped to handle the uncertainty that comes with such long timeframes.