Climate and Monetary Policy in BRICS Economies: Do Temperature Shocks Trigger Financial Instability?

Objectives This study examines the relationship between temperature shocks, monetary policy actions, and financial stability in BRICS countries (Brazil, Russia, India, China, and South Africa) using quarterly data from 2000 to 2024. It aims to assess how climate-related temperature fluctuations influence financial stability through monetary transmission channels. Materials and Methods A panel vector autoregression (PVAR) model with country fixed effects is employed to analyse the dynamic interactions among temperature anomalies, monetary policy rates, financial stress indices, inflation, and real GDP growth. Impulse response functions are used to trace the short- and long-term effects of climate shocks on macro-financial variables. Results The findings indicate that positive temperature shocks contribute to financial system instability through increased credit risk, higher equity market volatility, and reduced output growth. Financial stability deteriorates in the quarters following temperature shocks. Monetary policy reacts through interest rate adjustments, but these responses only partially mitigate the negative effects transmitted from climate-related shocks. The dynamic interactions confirm that climate variability influences both macroeconomic performance and financial conditions over time. Conclusion The results highlight the importance of integrating climate risks into macro-financial policy frameworks. Climate-sensitive macroprudential regulation, enhanced stress-testing mechanisms, and stronger coordination between monetary and environmental policies are essential to safeguard financial stability in emerging economies.