Precautionary monetary policy and democratic legitimacy: tensions and openings

Central banks are considering how best to respond, including through monetary policy, to the environmental risks created by processes like climate change and biodiversity loss. A 'market-fixing' response enjoyed early consensus among official institutions: its preference against actively influencing relative prices in the market reflects an intellectual heritage from dominant 21st-century macroeconomic theories of monetary policy. By contrast, an alternative, 'precautionary' approach accounts for the scale of potential negative consequences and radical uncertainty engendered by environmental risks. However, robust action by independent central banks to contribute to the sustainable transition raises concerns around accountability, placing the prevailing, binary interpretation of democratic legitimacy for monetary policy - which differentiates between 'inputs' and 'outputs' - under greater strain. This chapter reimagines the role of democratic institutions and processes in making monetary policy, drawing on a third, 'constructive' value of democracy, to find legitimacy for central banks to support fundamental economic change.