Climate Change and Monetary Policy in Indonesia: Evidence from Asymmetric Time Varying Granger Causality

Abstract

This study examines the asymmetric time-varying climate change shocks on monetary policy in Indonesia over the period January 1990 to March 2025. Performing a recent novel asymmetric time-varying Granger causality (AS-TVGC) technique, we capture the asymmetric climate change leading to monetary policy proxied by M0, M1, M2, and BI policy rate significantly. Empirical findings reveal that date stamping of climate change to monetary policy from TVGC estimations. In addition, the AS-TVGC profoundly exposes how the monetary policy responds to both positive and negative climate change shocks significantly. Specifically, we reveal that the monetary policy responds variously to climate change-positive, but persistently to climate change-negative. Consequently, in addition to addressing the exposure of asymmetric causal climate change to monetary policy, the central bank policy makers should take the mandate to design new climate-based monetary operations to set price stability and sustainable growth in the net-zero central banking framework.