Climate risk and the natural interest rate: An E-DSGE perspective

We examine the effect of climate-induced temporary extreme weather events on the natural real interest rate by incorporating environmental aspects into a Keynesian growth model. We find that environmental damage accentuates the reduction in the natural real interest rate caused by climate-induced temporary supply disruptions, and this effect is even more pronounced when the estimate of the current stock of carbon dioxide in the atmosphere doubles. •These extreme weather events lead to pronounced decrease in natural interest rate.•These extreme weather events also lead to a fall in productivity.•Future research: consider heterogeneous agents rather than a representative agent.•Future research: calibrate environmental parameters using other IAMs.•Future research: behavioural alternatives to rational expectations.