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Climate change: a team of Italian researchers develops new macroeconomic models to aid Central Banks in assessing financial risks

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A team of researchers from the Institute of Economics of the Sant'Anna School of Advanced Studies (Pisa), the Rff-Cmcc European Institute on Economics and the Environment (Milan), the Bocconi University and the Politecnico di Milano, obtained a research grant from the International Network for Sustainable Financial Policy Insights, Research and Exchange (Inspire) to develop new models to assess the financial risks assoociated with climate change -- and delineate the role of central banks in managing such risks.

A fast-increasing focus on the risks associated with climate change has led to the creation, in December 2017, of the Network for Greening the Financial System (Ngfs), an institution that includes the major central banks - such as those of France, Spain, Italy, Japan, Germany - and the most important financial regulatory institutions. Even as recently as Janurary 2020, the president of the European Central Bank Christine Lagarge urged central banks to contribute to the fight against climate change, to learn how to understand its risks, and to exploit the opportunities it generates.

Ngfs, together with Inspire, is thus funding research projects with the potential to contribute to this debate by studying how central banks and governments can co-manage the consequences of climate change and facilitate the “green transition” in the domains of macroeconomics and finance.

"There are two main classes of risks that climate change places on the financial system - explains Francesco Lamperti, project leader, researcher of the Institute of Economics and EMbeDS at the Sant'Anna School, and affiliate scientist at the Rff-Cmcc - One is related to physical impacts, think of the loss in value of properties due to floods or hurricanes. Another concerns the instabilities that the transition itself can create, especially in highly financialized sectors such as those still heavily dependent on coal. The main problem - continues Francesco - is that there is a lack of models capable of offering integrated assessments of both classes of risks and, above all, of testing which fiscal and monetary policy mechanisms are necessary to manage them”.

The project led by Francesco aims to develop a new macroeconomic model, capable of simultaneously analyzing both physical and transition risks for the global financial system. "Over the next year, we will develop a new approach to modeling climate risk for macroeconomic dynamics - concludes Francesco Lamperti - and, in particular, we will try to understand how fiscal policy, monetary policy and macroprudential policy can interact in a synergistic way to ensure a rapid and orderly transition towards a zero-emission economy by 2050”.

The funding announcement for the project, titled Building a macro-financial integrated assessment model for ordered transitions and fiscal-monetary policy interactions can be downloaded as a pdf on the right of this page.