Hostname: page-component-848d4c4894-2xdlg Total loading time: 0 Render date: 2024-06-21T04:09:30.708Z Has data issue: false hasContentIssue false
  • English
  • Français

Whatever it takes to save the planet? Central banks and unconventional green policy

Published online by Cambridge University Press:  13 February 2023

Alessandro Ferrari  and
Valerio Nispi Landi
Alessandro Ferrari
Affiliation:
DG Monetary Policy, Monetary Analysis Division, European Central Bank, Frankfurt am Main, Germany
Valerio Nispi Landi*
Affiliation:
Harvard Kennedy School, Cambridge, MA, USA Bank of Italy, Rome, Italy
*
*Corresponding author. Email: valerio.nispilandi@bancaditalia.it
Get access Rights & Permissions [Opens in a new window]

Abstract

We study the transmission mechanism of a Green QE, defined as a policy that tilts the central bank’s balance sheet toward green bonds, that is bonds issued by non-polluting firms. We merge a DSGE framework with an environmental model, in which CO2 emissions increase the stock of atmospheric carbon, which in turn decreases total factor productivity. Imperfect substitutability between green and brown bonds is a necessary condition for the effectiveness of Green QE. However, even under this assumption, the effect of Green QE in reducing emissions is negligible and in some cases close to nil.

Keywords

Central bankmonetary policyquantitative easingclimate change
Type
Articles
Information
Macroeconomic Dynamics , Volume 28 , Issue 2 , March 2024 , pp. 299 - 324
Copyright
© The Author(s), 2023. Published by Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

†

We thank the editor, two anonymous reviewers, and our discussant Barbara Annicchiarico for their useful feedback. We are also grateful to Katrin Assenmacher, Alessandro Cantelmo, Paola Di Casola, Massimo Ferrari Minesso, Gianluigi Ferrucci, Francesco Giovanardi, Peter Karadi, Filippo Natoli, Stefano Neri, Salvatore Nisticò, Maria Sole Pagliari, Andrea Papetti, Francesco Paternò, Cosimo Petracchi, Massimiliano Pisani, Luca Riva, Alessandro Secchi, Andrea Tiseno, seminar online participants at the ECB, Bank of Italy, Brown University, Sveriges Riksbank, E-axes Forum, and conference participants at the 19th Macroeconomic Dynamics Conference, at the 62nd Annual Conference of the Italian Economic Association, and at Banque de France’s conference on Advances in Macro and Finance Modelling of Climate Change for their comments and suggestions. The opinions expressed in this paper are those of the authors and do not necessarily reflect the views of the ECB, the Bank of Italy or the Eurosystem.

References

Abiry, R., Ferdinandusse, M., Ludwig, A. and Nerlich, C. (2022) Climate Change Mitigation: How Effective Is Green Quantitative Easing? ECB Working Paper, 2701.CrossRefGoogle Scholar
Alla, Z., Espinoza, R. A. and Ghosh, A. R. (2020) FX intervention in the New Keynesian model. Journal of Money, Credit and Banking 52(7), 1755–1791.CrossRefGoogle Scholar
Andres, J., López-Salido, J. D. and Nelson, E. (2004) Tobin’s imperfect asset substitution in optimizing general equilibrium. Journal of Money, Credit and Banking 36(4), 665–690.CrossRefGoogle Scholar
Angelopoulos, K., Economides, G. and Philippopoulos, A. (2013) First-and second-best allocations under economic and environmental uncertainty. International Tax and Public Finance 20(3), 360–380.CrossRefGoogle Scholar
Annicchiarico, B. and Di Dio, F. (2015) Environmental policy and macroeconomic dynamics in a New Keynesian model. Journal of Environmental Economics and Management 69, 1–21.CrossRefGoogle Scholar
Barrage, L. (2020) Optimal dynamic carbon taxes in a climate–economy model with distortionary fiscal policy. The Review of Economic Studies 87, 1–39.Google Scholar
Bartocci, A., Notarpietro, A. and Pisani, M. (2022) Green Fiscal Measures and Non-standard Monetary Policy in the Euro Area. Temi di Discussione (Bank of Italy Working Paper), 1377.CrossRefGoogle Scholar
Benigno, P. (2009) Price stability with imperfect financial integration. Journal of Money, Credit and Banking 41, 121–149.CrossRefGoogle Scholar
Benmir, G. and Roman, J. (2020) Policy Interactions and the Transition to Clean Technology. Centre for Climate Change Economics and Policy Working Paper, 368.Google Scholar
Brunnermeier, M. and Landau, J. P. (2020). Central banks and climate change. https://voxeu.org/article/central-banks-and-climate-change Google Scholar
Burlon, L., Gerali, A., Notarpietro, A. and Pisani, M. (2018) Non-standard monetary policy, asset prices and macroprudential policy in a monetary union. Journal of International Money and Finance 88, 25–53.CrossRefGoogle Scholar
Carattini, S., Heutel, G. and Melkadze, G. (2021) Climate Policy, Financial Frictions, and Transition Risk. NBER Working Paper, 28525.CrossRefGoogle Scholar
Carney, M. (2015). Breaking the tragedy of the horizon: Climate change and financial stability. Speech at Llyod’s of London. https://www.socialeurope.eu/green-money-without-inflation Google Scholar
Chen, H., Cúrdia, V. and Ferrero, A. (2012) The macroeconomic effects of large-scale asset purchase programmes. The Economic Journal 122(564), F289–F315.CrossRefGoogle Scholar
Coenen, G., Karadi, P., Schmidt, S. and Warne, A. (2018) The New Area-Wide Model II: An Extended Version of the ECB’s Micro-Founded Model for Forecasting and Policy Analysis with a Financial Sector. ECB Working Paper, 2200.CrossRefGoogle Scholar
Curdia, V. and Woodford, M. (2011) The central-bank balance sheet as an instrument of monetary policy. Journal of Monetary Economics 58(1), 54–79.CrossRefGoogle Scholar
Dafermos, Y., Nikolaidi, M. and Galanis, G. (2018) Climate change, financial stability and monetary policy. Ecological Economics 152, 219–234.CrossRefGoogle Scholar
De Grauwe, G. (2019). Green money without inflation. https://www.bis.org/review/r151009a.pdf CrossRefGoogle Scholar
Diluiso, F., Annicchiarico, B., Kalkuhl, M. and Minx, J. C. (2021) Climate actions and macro-financial stability: The role of central banks. Journal of Environmental Economics and Management 110, 102548.CrossRefGoogle Scholar
Ferrari, A. and Nispi Landi, V. (2021) Whatever It Takes to Save the Planet? Central Banks and Unconventional Green Policy. Temi di Discussione (Bank of Italy Working Paper), 1320.CrossRefGoogle Scholar
Ferrari, A. and Nispi Landi, V. (2022) Toward a Green Economy: The Role of Central Bank’s Asset Purchases. Temi di Discussione (Bank of Italy Working Paper), 1358.CrossRefGoogle Scholar
Ferrari Minesso, M. and Pagliari, M. S. (2021) No Country Is an Island: International Cooperation and Climate Change. ECB Working Paper, 2568.Google Scholar
Garcia-Cicco, J., Pancrazi, R. and Uribe, M. (2010) Real business cycles in emerging countries? American Economic Review 100(5), 2510–2531.CrossRefGoogle Scholar
Gertler, M. and Karadi, P. (2011) A model of unconventional monetary policy. Journal of Monetary Economics 58(1), 17–34.CrossRefGoogle Scholar
Gertler, M. and Karadi, P. (2013) Qe 1 vs. 2 vs. 3…: A framework for analyzing large-scale asset purchases as a monetary policy tool. International Journal of Central Banking 9, 5–53.Google Scholar
Gibson, J. and Heutel, G. (2020) Pollution and Labor Market Search Externalities over the Business Cycle. NBER Working Paper, 27445.CrossRefGoogle Scholar
Giovanardi, F., Kaldorf, M., Radke, L. and Wicknig, F. (2021) The Preferential Treatment for Green Bonds. Deutsche Bundesbank Discussion Paper, 51/2022.CrossRefGoogle Scholar
Golosov, M., Hassler, J., Krusell, P. and Tsyvinski, A. (2014) Optimal taxes on fossil fuel in general equilibrium. Econometrica 82(1), 41–88.Google Scholar
Hassler, J., Krusell, P. and Smith, A. A. Jr (2016) Environmental macroeconomics. In Handbook of Macroeconomics, Vol. 2, pp. 1893–2008. Amsterdam: Elsevier.Google Scholar
Heutel, G. (2012) How should environmental policy respond to business cycles? Optimal policy under persistent productivity shocks. Review of Economic Dynamics 15(2), 244–264.CrossRefGoogle Scholar
Nispi Landi, V. (2020) Capital controls spillovers. Journal of International Money and Finance 109, 102238.CrossRefGoogle Scholar
Nordhaus, W. D. (2008) A Question of Balance: Economic Modeling of Global Warming. New Haven: Yale University Press.CrossRefGoogle Scholar
Schmitt-Grohé, S. and Uribe, M. (2003) Closing small open economy models. Journal of International Economics 61(1), 163–185.CrossRefGoogle Scholar
Schoenmaker, D. (2019) Greening Monetary Policy. Bruegel Working Paper, 2019/2.CrossRefGoogle Scholar
Sims, E. and Wu, J. C. (2021) Evaluating central banks’ tool kit: Past, present, and future. Journal of Monetary Economics 118, 135–160.CrossRefGoogle Scholar
Tobin, J. (1969) A general equilibrium approach to monetary theory. Journal of Money, Credit and Banking 1(1), 15–29.CrossRefGoogle Scholar
Wallace, N. (1981) A Modigliani-Miller theorem for open-market operations. American Economic Review 71, 267–274.Google Scholar
Weidmann, J. (2019). Climate change and central Banks. In: Welcome Address at the Deutsche Bundesbank’s Second Financial Market Conference. https://www.bundesbank.de/en/press/speeches/climate-change-and-central-banks-812618 Google Scholar