The impact of climate change and policies on the balance of payments and central banking in commodity-exporting emerging economies

Amber sunset with a wind turbine in the background


The research proposes to assess the implications of climate change and policies for monetary policy mediated through their impact on the balance of payments.

It focuses on low income countries where pressures from the balance of payments and subsequent implications for exchange rates are a key determinant of monetary policy making. It conducts a case study of transitional and physical risks in countries where the influence of balance of payments on monetary policy is shaped by their strong dependence on primary commodities, on top of their larger vulnerability to external financial shocks in comparison with high income economies.

The project addresses both (a) transitional risks, i.e. the indirect effects coming with climate change and climate policies (e.g. sudden divestment strategies, changes in demand patterns, recessionary pressure and the risk of economic and financial crises); as well as (b) physical risks of climate change that encompass the direct physical destructions due to natural disasters such as droughts and floods.

Research overview

We use two case studies of lower middle and 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 COVID-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 its 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.

Publications and outputs

  • Presentation of the working paper The new normal. Measuring balance-of-payments vulnerability vis-à-vis climate (transition) risks at the SASE conference, July 2-6, 2021.

This research project is funded by INSPIRE via ClimateWorks Foundation.