South African Reserve Bank publishes simulation working paper on climate shocks and monetary policy in South Africa

The South African Reserve Bank has published a working paper using a simulation-based dynamic stochastic general equilibrium (DSGE) model to assess how climate change shocks could affect South Africa’s macroeconomic stability and monetary policy dynamics. The study finds that climate variability can materially influence inflation expectations and economic output, implying a need for monetary policy approaches that explicitly incorporate climate risks. The modelling covers a 50-year horizon (2025–2075) and assesses climate-induced disruptions including shifts in agricultural productivity, natural disasters and broader environmental conditions, tracing impacts on inflation, employment, exchange rates and interest rates. Using 500 Monte Carlo simulation draws and multiple scenarios (baseline, stochastic climate shocks, a fiscal expansion shock and a tax policy shock), the results show climate stress can depress output, consumption, investment and employment while generating cost-push inflation and greater uncertainty around inflation expectations. The framework also highlights policy trade-offs where interest rate increases to keep inflation within the 3% to 6% target range may weigh on growth and raise unemployment, alongside increased exchange rate volatility. As part of the South African Reserve Bank Working Paper Series, the research is positioned as preliminary and intended to elicit comments and stimulate debate, and the views expressed are those of the authors rather than South African Reserve Bank policy.