Impact of climate change on output and inflation in Africa’s largest economies

Abstract

ABSTRACT Africa continues to endure the negative effects of climate change, which have become increasingly visible in the agricultural sector, posing challenges to policies aimed at price stability and economic growth. Thus, this study applies the Structural Auto-regression (SVAR) model to estimate the impact of climate change on output and inflation in Egypt, Nigeria, and South Africa using monthly data from 2002M01 to 2020M12. The findings reveal that a rise in climate change reduces the real output from its potential level and causes increases in food as well as general consumer prices across the countries. On the one hand, South Africa and Nigeria are estimated to have the most impact. On the other hand, Egypt's real output, food and consumer price inflation are estimated to have the least. Overall, the estimates show that climate change has the greatest impact on food price inflation, followed by general consumer price inflation, and finally real output. One key policy implication of this study's findings is that effective emission reductions that lowers climate change can boost economic growth while also reining in food and consumer price inflation. Thus, suggesting that bringing down climate change significantly can help central banks achieve price and output stability.