Responses of financial stress and monetary policy to global warming: Evidence from China

Abstract

We explore the marginal dynamic effect of abnormal temperature rise on China's financial stress and monetary policy using monthly data from January 2002 to December 2019. Our empirical results demonstrate that: (a) China's financial stress has a positive response to an increase in abnormal temperature change shock significantly, especially in the 4–7 months after the shock; (b) the introduction of monetary policy regulation into the economic system can effectively alleviate the financial instability caused by the rise in temperature; (c) from the perspective of the effectiveness of monetary policy transmission, price-based monetary policy is generally better than quantity-based monetary policy; (d) the adjustment of monetary policy can effectively expand the financing scale of the whole society with credit scale mattering most; (e) when financial stress is higher, the impact of a temperature shock on the financial market is stronger, as the stabilizing effect of expansionary monetary policy is more obvious. Our results are robust to wider checks and have important policy implications.