To Be or Not to Be “Green”: How Can Monetary Policy React to Climate Change?

40 Pages Posted: 25 Nov 2021

See all articles by Lena Boneva

Lena Boneva

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Gianluigi Ferrucci

European Central Bank (ECB)

Francesco Paolo Mongelli

European Central Bank (ECB); Goethe University Frankfurt

Date Written: November 1, 2021

Abstract

Climate change has profound effects not only for societies and economies, but also for central banks’ ability to deliver price stability in the future. This paper starts by documenting why climate change matters for monetary policy: it impacts the economic variables relevant to setting the monetary policy stance, it interacts with fiscal and structural responses and it can generate dislocations in financial markets, which are impossible for monetary policy to ignore. Next, we survey several possible ways central banks can respond to climate change. These range from protective actions to more proactive measures aimed at mitigating climate change and supporting green finance and the transition to sustainable growth. We also discuss the constraints and trade-offs faced by central banks as they respond to climate risks. Finally, focusing on the specific challenges faced by inflation-targeting central banks, we consider how certain design features of this regime might interact with, and evolve in response to, the climate challenge.

Keywords: climate change, environmental economics, green finance, monetary policy, sustainable growth economics

JEL Classification: E52, E58, Q54

Suggested Citation

Boneva, Lena and Ferrucci, Gianluigi and Mongelli, Francesco Paolo, To Be or Not to Be “Green”: How Can Monetary Policy React to Climate Change? (November 1, 2021). ECB Occasional Paper No. 2021/285, Available at SSRN: https://ssrn.com/abstract=3971287 or http://dx.doi.org/10.2139/ssrn.3971287

Lena Boneva (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Gianluigi Ferrucci

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Francesco Paolo Mongelli

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
1,241
Abstract Views
2,713
Rank
30,859
PlumX Metrics