Bundesbank Discussion Paper Compares Central Bank Models of Carbon-Intensive Energy Price Shocks

Key Takeaways

• Deutsche Bundesbank Discussion Paper No.
• 28/2026 compares six central bank multi-sector models and finds that temporary and permanent carbon-intensive energy price increases are both inflationary, though the permanent case depends on model assumptions and monetary policy response.
• The paper imposes no regulatory obligations.
• It is useful for compliance and risk teams because it shows how supervisors and central banks think about climate-related macro scenarios, which can shape stress testing and scenario expectations.

Deep Dive

Deutsche Bundesbank Discussion Paper No. 28/2026 compares six central bank multi-sector models and finds that temporary and permanent carbon-intensive energy price increases are both inflationary, though the permanent case depends on model assumptions and monetary policy response. The paper imposes no regulatory obligations. It is useful for compliance and risk teams because it shows how supervisors and central banks think about climate-related macro scenarios, which can shape stress testing and scenario expectations.

In the aligned scenario, carbon-intensive energy prices rise 25% over four quarters and then decay with a persistence of 0.5. Inflation peaks on impact at an average of about 2 percentage points, with a cross-model range of roughly 1 to 3 percentage points. The euro area is more exposed than the United States. Permanent increases lower real variables such as GDP and consumption by about 1% on average after 10 years. Inflation outcomes depend on the central bank's rule and on expectation formation. If the new lower output level is fully and immediately priced in, deflation can result. If adjustment is perceived as gradual, the outcome is inflationary. Under a temporary shock, all three monetary policy rules studied fail to prevent an inflation surge, though they differ in the interest rate adjustment required.

For compliance and risk teams, the main implications concern scenario design and model risk. Institutions using climate or energy shock scenarios in ICAAP, stress testing, or climate risk assessments should recognize that results are sensitive to the assumed shock source, monetary policy reaction, and expectations. They should avoid relying on a single model or a single path for inflation and interest rates. Sectoral exposure matters as well, since the models stress that climate and energy shocks hit sectors unevenly, with consequences for credit quality, financial stability, and monetary transmission.

Recommended actions:
- Log the paper in the regulatory horizon-scanning inventory as informational.
- Share it with stress testing, market risk, ALM, and climate risk teams.
- Compare internal energy shock scenarios with the paper's calibration (25% shock, 0.5 decay, 0.7 interest rate smoothing).
- Document sensitivity analysis for inflation and rate paths in both temporary and permanent shock cases.
- Monitor NGFS and ECB follow-up outputs that could turn these findings into scenario guidance.

Overall risk impact is low in terms of direct compliance exposure and moderate in terms of strategic and model risk relevance.

Source: Deutsche Bundesbank