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Climate change and central banks: what role for monetary policy?

Author

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  • Lena Boneva
  • Gianluigi Ferrucci
  • Francesco Paolo Mongelli

Abstract

Climate change has profound effects not only on societies and economies, but also for the ability of central banks to deliver price stability in the future. Among others, climate change impacts the monetary transmission mechanism, the policy space available to central banks, and has implications for the design of the monetary policy framework. Thus, taking no action is not a viable option, even for central banks without an explicit sustainability mandate. This article establishes a framework for the integration of climate change objectives into monetary policy in the context of the existing central bank mandates. Currently, only in a few cases do such mandates refer explicitly to sustainable growth and development as a policy objective for the central bank. The article discusses several possible ways central banks can respond to climate change, ranging from protective actions to more proactive measures aimed at mitigating climate change by supporting green finance and the transition to a low carbon economy. It also focuses on understanding the constraints and opportunities for action in this arena.Key policy insights Increasingly, central banks are being called upon to support an orderly transition to a low-carbon economy, not only in their financial stability capacity, but also with monetary policy measures.Independently of their specific mandate, central banks should consider protective and awareness raising actions, to ensure resilience vis-à-vis emerging climate-related risks and to safeguard the continued smooth conduct of monetary policy.Subject to their mandates, central banks should also consider designing monetary operations with green features to proactively support the environmental goals of their respective government.While proactive measures have the potential to be more impactful, they are also more controversial unless the central bank has a clear mandate to act on climate.

Suggested Citation

  • Lena Boneva & Gianluigi Ferrucci & Francesco Paolo Mongelli, 2022. "Climate change and central banks: what role for monetary policy?," Climate Policy, Taylor & Francis Journals, vol. 22(6), pages 770-787, July.
    • Handle: RePEc:taf:tcpoxx:v:22:y:2022:i:6:p:770-787
    DOI: 10.1080/14693062.2022.2070119
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    Citations

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    Cited by:

    1. Campiglio, Emanuele & Spiganti, Alessandro & Wiskich, Anthony, 2024. "Clean innovation, heterogeneous financing costs, and the optimal climate policy mix," Journal of Environmental Economics and Management, Elsevier, vol. 128(C).
    2. Masciandaro, Donato & Russo, Riccardo, 2024. "Monetary and macroprudential policies: How to Be green? A political-economy approach," Economic Modelling, Elsevier, vol. 141(C).
    3. Feldkircher, Martin & Teliha, Viktoriya, 2024. "Speeches in the green: The political discourse of green central banking," Energy Economics, Elsevier, vol. 135(C).
    4. Eleftherios Spyromitros, 2023. "Determinants of Green Innovation: The Role of Monetary Policy and Central Bank Characteristics," Sustainability, MDPI, vol. 15(10), pages 1-23, May.
    5. Joao R. Faria & Peter Mcadam & Bruno Viscolani, 2023. "Monetary Policy, Neutrality, and the Environment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(7), pages 1889-1906, October.
    6. Chien-Chiang Lee & Farzan Yahya & Md Reza Sultanuzzaman, 2024. "Monetary Policy Uncertainty And Agricultural Climate Risk: Does The Agricultural Kuznets Curve Exist?," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 27(4), pages 631-654, December.
    7. Jawadi, Fredj & Rozin, Philippe & Cheffou, Abdoulkarim Idi, 2024. "Toward green central banking: Proposing an augmented Taylor rule," Energy Economics, Elsevier, vol. 134(C).
    8. Antoine Ebeling, 2024. "ECB’s Climate Speeches and Market Reactions," Working Papers of BETA 2024-38, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    9. Bin Wang & Jiaxin Liu, 2024. "Impact of Climate Change on Green Technology Innovation—An Examination Based on Microfirm Data," Sustainability, MDPI, vol. 16(24), pages 1-25, December.
    10. Mongelli, Francesco Paolo & Ceglar, Andrej & Scheid, Benedikt Alois, 2024. "Why do we need to strengthen climate adaptations? Scenarios and financial lines of defence," Working Paper Series 3005, European Central Bank.
    11. Liebich Lena & Nöh Lukas & Rutkowski Felix & Schwarz Milena, 2023. "Unconventionally Green: Monetary Policy between Engagement and Conflicting Goals," Review of Economics, De Gruyter, vol. 74(1), pages 53-77, April.
    12. D’Orazio, Paola, 2024. "Assessing the fiscal implications of changes in critical minerals’ demand in the low-carbon energy transition," Applied Energy, Elsevier, vol. 376(PA).
    13. Mathias Lund Larsen, 2023. "Bottom-up market-facilitation and top-down market-steering: comparing and conceptualizing green finance approaches in the EU and China," Asia Europe Journal, Springer, vol. 21(1), pages 61-80, March.
    14. Steffen Murau & Armin Haas & Andrei Guter-Sandu, 2024. "Monetary architecture and the Green Transition," Environment and Planning A, , vol. 56(2), pages 382-401, March.
    15. Naz, Farah & Tanveer, Arifa & Karim, Sitara & Dowling, Michael, 2024. "The decoupling dilemma: Examining economic growth and carbon emissions in emerging economic blocs," Energy Economics, Elsevier, vol. 138(C).

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