Greening Monetary Policy
Climate Policy, 21(4), 581-592.
22 Pages Posted: 19 Sep 2018 Last revised: 29 Mar 2021
Date Written: March 26, 2021
While there is increasing interest in decarbonising or greening monetary policy, central banks are keen to maintain market neutrality. However, there is evidence that the market has a bias towards carbon-intensive companies. The paper develops a method to tilt the European Central Bank’s (ECB) asset and collateral framework towards low-carbon assets. We find that a medium tilting approach reduces carbon emissions in the ECB’s corporate and bank bond portfolio by over 50%. We show that a low carbon allocation can be done without undue interference with the transmission mechanism of monetary policy.
Keywords: Monetary Policy, Collateral, Decarbonising, Carbon Emissions, Cost of Capital
JEL Classification: E52, E58, Q01, Q52, Q54
Suggested Citation: Suggested Citation