Whatever it Takes to Save the Planet? Central Banks and Unconventional Green Policy

Abstract

We study the effects of a temporary Green QE, defined as a policy that temporarily tilts the central bank's balance sheet toward green bonds, i.e. bonds issued by firms in nonpolluting sectors. To this end, we merge a standard DSGE framework with an environmental model in which detrimental emissions increase the stock of pollution. Imperfect substitutability between green and brown bonds is a necessary condition for the effectiveness of Green QE. While a temporary Green QE is an effective tool for mitigating detrimental emissions, it has limited effects in reducing the stock of pollution, if pollutants, e.g. CO2, stay in the atmosphere for a long time. The welfare gains of Green QE are positive but small. Welfare gains are larger if the flow of emissions negatively affects the utility of households.

Climate Policy, Financial Frictions, and Transition Risk

“…Chan (2020) compares fiscal and monetary policies to climate policies. As mentioned earlier, like our paper, Diluiso et al (2020) also combine an E-DSGE model with financial frictions and macroprudential policy, as do Benmir and Roman (2020) and Ferrari and Landi (2020).…”

To Be or Not to Be “Green”: How Can Monetary Policy React to Climate Change?

“…They concur that monetary policy alone is generally ineffective in stemming climate change. For example, Ferrari and Nispi Landi (2020) show that green QE has a very limited impact on reducing the stock of emissions and, therefore, on pursuing climate objectives (a similar conclusion is reached for interest rate policies by Ferrari and Pagliari, 2021).…”

Climate Change Mitigation: How Effective is Green Quantitative Easing?

“…Our long-run focus distinguishes us from work on green QE for the short-run. E.g., Ferrari and Landi (2020) and Benmir and Roman (2020) study climate policies along the business cycle by combining a climate model with a New Keynesian DSGE model with the financial accelerator framework of Gertler and Karadi (2011). As we do, they understand green QE as a tilting of the portfolio held by the central bank towards the green sector.…”

“…As we do, they understand green QE as a tilting of the portfolio held by the central bank towards the green sector. Ferrari and Landi (2020) avoid a perfect crowding out by introducing costly portfolio rebalancing for private agents. They find that an aggressive expansion of green QE (i.e., selling dirty and buying clean assets) during expansions is welfare improving.…”