Monetary Policy and Green Investments

Dear Colleagues,

Amid some notable exceptions, major central banks policies (for the most part) have not officially integrated the goal of helping nations facing current and future ecological challenges in their mandate. For instance, on 24 October 2023, while the US Fed Chairman Jerome Powell acknowledged the importance of climate-related financial risks for bank supervision, he also stated that “The Federal Reserve is not and will not be a ‘climate policymaker.’ Decisions about policies to address climate change must be made by the elected branches of government. Over time, we must be vigilant to avoid crossing or blurring that line. It is not the Fed's role to tell banks which businesses they can and cannot lend to...”. By contrast, the ECB has embraced the concept of addressing environmental challenges as part of its mission, although not to the same level as its traditional objectives. In developing its climate and nature plan, the ECB intends to focus on three areas (in 2024–25)—(1) the implications of the green transition; (2) the physical impact of climate change; and (3) the risk that nature loss and degradation pose to the economy—without inflicting prejudice to its price stability objective. The Network for Greening the Financial System (NGFS) was created in 2017 by eight founding central banks. It is a significant step towards increasing involvement and awareness of climate risks faced by the financial system and the global economy.

This IJFS Special Issue on “Monetary Policy and Green Investments” aims at providing insights and new ways of thinking about monetary policies, aiming to mobilize the tremendous power of money creation for addressing the challenges of the ecological transition and the needs for green investments. Possible topics include the following: (1) the specific role of central banks can play in fostering these green investments vs. other entities (such as development banks, as well as European and other national investment banks) and vs. fiscal policy (e.g., the European Green Deal); (2) how to incorporate issues of double materiality and ESG ratings in asset repurchase or refinancing programs that can be targeted to foster green investments; (3) what are the potential conflicts of interests arising from pursuing price stability and full employment vs. encouraging a greener economy; (4) what kinds of models, such as ABM, DSGE, Neo-Keynesian, and Stock-Flow, can inform central policy makers about the impact of money flows and the financial sector onto a sustainable long-run equilibrium, achieving net carbon neutrality and/or the Paris Agreement targets; (5) what is the optimal long-run equilibrium interest rate/inflation rate that accounts for climate change catastrophic vs. optimistic scenarios (e.g., avoiding the “tragedy of the horizon”); (6) how can a systemic view be adopted in central bankers’ decision-making framework; (7) how can MMT contribute to our understanding of the link of monetary policy with green investments; (8) can digital central bank money help with the allocation of resources towards more sustainable investments; (9) what are the risk measures and indicators that central banks need to (co-)develop or retrofit for their needs to guide them towards these types of investments; (10) what does a comparative analysis of a sample of central banks approaches teach us about the alignment of the goals and inter-bank cooperation; (11) is there such thing as central banking “green washing”. All contributions—from the purely conceptual, policy-oriented with a conceptual or empirical framework to theoretical models with simulations, empirical-based models (quantitative or qualitative), etc.—are welcome. Transversal approaches mixing economic, ecological, geophysical, sociological, and behavioral approaches are also welcome.

References:

1. Campiglio, E.; Dafermos, Y.; Monnin, P.; Ryan-Collins, J.; Schotten, G.; Tanaka, M. Climate change challenges for central banks and financial regulators. Nat. Clim. Chang. 2018, 8, 462–468, ISSN 1758-678X.
2. Dafermos, Y.; Nikolaidi, M.;Galanis, G. A stock-flow-fund ecological macroeconomic model. Ecol. Econ. 2017, 131, 191–207, ISSN 0921-8009. https://doi.org/10.1016/j.ecolecon.2016.08.013.
3. Eliet-Doillet, A.; Maino, A.G. Central Banks' "Green Shift" and the Energy Transition; OIES Paper: ET, No. 10; The Oxford Institute for Energy Studies: Oxford, UK, 2022; ISBN 978-1-78467-197-6.
4. Konradt, M.; McGregor, T.; Toscani, F. Carbon Prices and Inflation in the Euro Area; International Monetary Fund: Washington, DC, USA, 2024; Volume 2024, p. 41, ISSN 1018-5941. ISBN 9798400267277. https://doi.org/10.5089/9798400267277.001.
5. Lagoarde-Ségot, T.; Revelli, C. Ecological money and finance. Introducing ecological risk-free assets. Int. Rev. Financ. Anal. 2023, 90, 2102871, ISSN 1057-5219. https://doi.org/10.1016/j.irfa.2023.102871.
6. Nakov, A.; Thomas, C. Climate-Conscious Monetary Policy; Banco de España: Madrid, Spain, 2023. https://repositorio.bde.es/handle/123456789/34755.
7. Tufail, S.; Alvi, S.; Hoang, V.N.; Wilson, C. The effects of conventional and unconventional monetary policies of the US, EU, and China on global green investment. Energy Econ. 2024, 134, 107549, ISSN 0140-9883. https://doi.org/10.1016/j.eneco.2024.107549.
8. Schnabel, I. Monetary policy tightening and the green transition. In International Symposium on Central Bank Independence, Sveriges Riksbank, Stockholm. Speech by Isabel Schnabel, Member of the Executive Board of the ECB. https://www.ecb.europa.eu/press/key/date/2023/html/ecb.sp230110~21c89bef1b.en.html.

Dr. Christophe Fauger̀e
Guest Editor

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• green central banking
• new policy tools
• transition and physical risks
• Paris agreement targets
• systemic risks
• long-run environmental discount rate