Abstract

The climate-induced financial instability hypothesis, developed in a context of
growing concern about the economic consequences of the environmental crisis, expresses
possible imbalances in the monetary and financial sides of the economic system promoted by
climate change. This article aims to make a theoretical analysis and an empirical investigation
of this hypothesis. To this end, it was sought: i) describe the channels through which climate
change destabilizes financial systems; ii) identify the main responses of central banks;
iii) verify the validity of this hypothesis, using the GMM method in a panel data structure
formed by a sample of 90 countries in the period from 2002 to 2020. The results suggest that in recent years, climate change has increased financial volatility, while central banks have remained
committed to conventional monetary policies.

JEL Classification: E58; Q54; G00.