Environmental change and the international lender of last resort

The necessary alignment of the financial system to the objectives of the Paris Agreement has been the object of an increasing number of studies since 2015, giving a new role to central banks. But the international aspects of this alignment have not been specifically addressed yet. International financial flows are nowadays a key determinant of the macro-dynamics of all types of economies. In the case of developing and emerging economies, the capacity to attract international financial flows from developed economies, or to protect themselves against sudden stops, determines not only their ability to generate growth, but also the quality of that growth. In that respect, the capacity to finance the investments required for a low-carbon transition or for adaptation strategies to climate change, or the possibility to avoid investments detrimental to the environment, depends heavily on the financial position of the country in a hierarchical international monetary system. As the lender of last resort in the domestic financial system, the central bank is the key actor at the country level to ensure that liquidity provision is aligned with a sustainable development path. But its own action is constrained by its need to guarantee some access to international liquidity to its domestic actors. The international lender of last resort thus holds the ultimate position in this intricate network of liquidity provision, providing the means of payments for international transactions. However, this actor does not exist as an upperhand institution. It can only proceed from arrangements between central banks and other actors. Therefore, aligning financial flows with the objectives of the Paris Agreement implies that the institutions at the heart of the function of the international lender of last resort are aligned as well.