Most of the articles that analyze the macroeconomic impact of the physical risks of climate change focus on discrete, one-time events such as floods, hurricanes and draughts. This paper studies a long-term manifestation of physical risks (namely, changes in rainfalls) and its macroeconomic impacts in a developing country such as Argentina. We document a downward trend in rainfalls in the main agricultural area of Argentina, using daily data starting in 1970. We further use changes in rainfall as an instrument for on the export performance of the main agricultural complexes: soy, wheat, corn and sunflower, from 2003 to 2019. Using an instrumental variable approach, we study the impact of changes in rainfall on foreign exchange reserves, controlling for economic activity, capital flows and debt repayments. We find that drops in rainfall in the months of January (mainly) and February are significantly associated with lower reserve accumulation by the central bank. This result is robust to several specifications.
We assess the implications of climate change and policies for monetary policy mediated through their impact on the balance of payments. We examine transitional and physical risks in developing countries where the influence of balance of payments on monetary policy is shaped by the countries’ strong dependence on primary commodities, on top of their larger vulnerability to external financial shocks in comparison with developed economies.
We use two case studies of middle-income countries to conduct this research. We analyse the experience of Nigeria, an oil-dependent commodity exporter, during three sharp declines of international oil prices (the global financial crisis of 2008, the fall in oil prices in 2014, and the fall in 2020 due to the C-19 pandemic). This will serve as an example of the potential impact of transitional risks such as decarbonisation policies and divestment strategies. Regarding physical risks, we take the case of Argentina, a country with a significant share of agricultural products in its export basket. The country is experiencing more frequent and prolonged droughts and floods in main agricultural regions.
The study conducts a mixed methodology approach. The focus will be on export performance, exchange rate volatility, and the implications for monetary policy design and implementation, capturing direct (trade balance) and indirect effects (exchange rate and financial stability) of developments in commodity exports and prices. Immediate effects are assessed with the help of event studies and time series econometric analyses. These quantitative results are triangulated with qualitative data derived from semi-structured expert interviews with central bankers.