Monetary Policy and Climate Change

Abstract

Abstract Without a doubt, climate change will have a strong impact on both the European and the global economy. This report examines to what extent this requires action from central banks such as the ECB. While it is not contested that central banks need to undertake necessary steps to ensure price and financial stability within their mandates, some commentators suggested that central banks should also actively support the transition to a low-carbon economy through their impact on financial markets. Our report draws a rather pessimistic conclusion regarding the effectiveness and desirability of such active policies. Even if the discussion around the central bank’s primary mandate is excluded, existing research shows that using monetary policy instruments to support the green transition might involve sizeable adverse side effects and is moreover much less effective than fiscal policy instruments.