From financial instability to green finance: the role of banking and credit market regulation in the Eurace model

Abstract

We investigate appropriate banking and regulatory policies aimed at pushing the banking sector to shift from speculative lending, cause of asset bubbles and economic crises, to green investments lending, so to foster the transition to a more energy efficient production technology. For this purpose, we consider an enriched version of the Eurace model, which includes heterogenous capital goods, allowing for different degrees of energy efficiency in the production technology. Credit money in Eurace is endogenous and limited by Basel capital adequacy regulation on the supply side, while on the demand side it is determined by firms' investments and households' house purchasing. We introduce a differentiation of capital requirements according to the destination of lending, demanding higher banks' capital in the case of speculative lending, thus encouraging banks to finance firms investments. As up-to-date capital goods have better energy efficiency in the model design, a higher pace of investments implies also a positive environmental effect. Results suggest that the proposed regulation is able to foster investments and capital accumulation in the short term, improving the energy efficiency of firms. However, reducing mortgages with a restrictive regulation has a negative impact on total private credit, and thus on endogenous money supply, weakening consumption and aggregate demand. In the long term, the contraction of total credit becomes stronger, and the negative outcomes on aggregate demand also affect investments. Therefore, in the long run, the positive effects on capital and energy efficiency become negligible, while the main economic indicators deteriorate. JEL codes: E51, Q58, C63

Creating Agent-Based Energy Transition Management Models That Can Uncover Profitable Pathways to Climate Change Mitigation

“…Determining storage needed in schemes with more intermittency is also an ideal candidate for ABM studies (e.g., [66]). And when it comes to cap defining policies for financing green innovation ABMs are also proving increasingly useful [67].…”

Agent-Based Macroeconomics

“…This effect is particularly strong if the countercyclical policy is based on total credit in the economy. Raberto et al (2018) explore in the framework of the Eurace simulator (EUGE) how a capital adequacy requirement for banks, which requires lower reserves for firm loans compared to household mortgages, might foster firms investment in new technologies and the transition to green energy production. They find that such regulatory schemes in the short run indeed speed up firm investment in new technologies, but at the same time reduce overall growth due to stronger constraints on household expenditures.…”

“…In the version of EUGE inRaberto et al (2018) capital is differentiated with respect to its energy efficiency.…”

Designing scalable and stock-flow-consistent agent-based models: Policy scenarios and experiments on housing markets, monetary unions and interbank networks

“…Publication status: The paper is accepted and published by Journal of Evolutionary Economics, see Raberto et al (2018).…”

“…The statistical tests suggest the results are indifferent to external price dynamics. A detailed discussion on robustness test and empirical validation on the choices made for p 0 and ξ 0 are given in Section 3 of our relevant work Raberto et al (2018).…”