Nature degradation and price stability: implications and research questions for monetary policy

Nature degradation can negatively affect output, investment, employment, consumption and trade, with potential implications for price stability. This policy brief examines how nature degradation affects key macroeconomic indicators, with a focus on deforestation. It argues that central banks should consider the impacts of nature degradation alongside climate-related factors in monetary policy.

Main messages

• Nature degradation continues at an alarming rate globally.
• Policy interest in linking nature degradation to price stability is growing. Emerging work on climate and inflation, and studies of ecosystem services and their price impacts offer a starting point for exploring the link from nature degradation to price stability.
• Deforestation, a significant cause nature degradation, is a major source of risk as the global economy and financial system rely on the ecosystem services provided by forests.
• Disruption to forests’ ecosystem services triggers cascading effects that can reverberate across macroeconomic indicators, affecting the economy through output, employment, investment, consumption and the trade balance, ultimately impacting prices.
• Nature-related transition risks can also drive price volatility in the short term, for example through policies to conserve nature and manage deforestation-linked supply chains.
• These price impacts can challenge central banks’ traditional monetary policy tools, which typically focus on demand-side factors.
• The link between nature degradation and price stability raises questions around the time horizon of shocks, the supply chain impacts and the different ways in which the interaction of nature and climate shocks can affect prices.
• More research is needed to better understand the implications of nature degradation for monetary policy.