INTERNATIONAL MONETARY FUNDEye of the Storm:TheImpact of ClimateShocks on Inflationand GrowthSerhan Cevik and Joao Tovar JallesWP/23/87WORKING PAPER2023APRFUND2023 International Monetary FundWP/23/87IMF Working PaperEuropean DepartmentEye of the Storm:The Impact of Climate Shocks on Inflation and GrowthPrepared by Serhan Cevik and Joao Tovar Jalles'Authorized for distribution by Bernardin AkitobyApril 2023IMF Working Papers describe research in progress by the author(s)and are published to elicit commentsand to encourage debate.The views expressed in IMF Working Papers are those of the author(s)and donot necessarily represent the views of the IMF,its Executive Board,or IMF management.AbstractWhat is the impact of climate change on inflation and growth dynamics?This is not a simplequestion to answer as climate shocks tend to be ubiquitous,but with opposing effectssimultaneously on demand and supply.The extent of which climate-related shocks affect inflationand economic growth also depends on long-run scarring in the economy and the country's fiscaland institutional capacity to support recovery.In this paper,we use the local projection method toempirically investigate how climate shocks,as measured by climate-induced natural disasters,influence inflation and economic growth in a large panel of countries over the period 1970-2020.The results shows that both inflation and real GDP growth respond significantly but also differentlyin temms of direction and magnitude to different types of disasters caused by climate change.Wesplit the full sample of countries into income groups-advanced economies and developingcountries-and find a striking contrast in the impact of climate shocks on inflation and growthaccording to income level,state of the economy,and fiscal space when the shock hits.JEL Classification Numbers:E31;E32;E62;N10Climate change;natural disasters;inflation;growth;localKeywords:projections;panel dataAuthor's E-Mail Address:1 The authors would like to thank Helge Berger,Romain Duval,Gianluigi Ferrucci,Zeina Hasna,FlorenceJaumotte,Emanuele Massetti,Christine Richmond,Axel Schimmelpfennig,Glebs Starovoits,Alice TianboZhang,and the participants of a seminar at the European Department of the International Monetary Fund(IMF)for helpful comments and suggestions.