# Emerging contemporary monetary policy issues in Africa: An application of wavelet and quantile techniques to climatic shocks on inflation

## TL;DR

This paper explores how climate change affects inflation in four African countries, showing that it creates inflationary pressures and uncertainty.

## Contribution

The study introduces wavelet and quantile techniques to analyze how climate shocks asymmetrically impact inflation in African economies.

## Key findings

- Climate change shocks are dynamically interconnected with inflation in African countries.
- The inflationary impact of climate shocks varies depending on the inflation regime.
- Climate shocks increase inflation uncertainty, challenging central banks' monetary policies.

## Abstract

Recently, the inflationary impacts of climate change shocks have emerged among key constraints to price and financial stability. In line with this development, some Central banks are incorporating climate change risks in their surveillance activities. Thus, this study examines the asymmetric inflationary impact of climate change shocks on food and general consumer prices in Algeria, Egypt, Nigeria, and South Africa. The study employs a panel quantile via the moment’s method and a wavelet coherency analysis for monthly from 2000M01 to 2023M12. The empirical results reveal that, first, there is a dynamic interconnectedness between climate change shocks and inflation. Secondly, the results show that climate change shocks have an inflationary impact on food and general consumer prices. However, the magnitude and direction of the impact depend on the prevailing inflationary regime. Finally, the analysis shows that climate change shocks raise inflation uncertainty. Collectively, these findings imply that climate change shocks are key sources of inflationary pressures and uncertainty, posing significant challenges to central banks’ inflation management. One implication of these findings is that central banks in these countries will likely face extreme difficulty stabilising inflation since monetary policy instruments are mainly demand management, and thus may be ineffective in dealing with climate change shocks. In line with the findings, the study recommends that these countries should enhance their inflation surveillance and monetary policy strategies but considering the potential climate change risks.