Is There a Role for Central Banks in the Low-Carbon Transition? A Stock-Flow Consistent Modelling Approach

32 Pages Posted: 27 Nov 2017

See all articles by Irene Monasterolo

Irene Monasterolo

Utrecht University

Marco Raberto

Università degli Studi di Genova - DIME - Department of Mechanics, Energetics, Management and Transportation

Date Written: November 21, 2017

Abstract

Climate change was recognized as a risk for ecosystems and the economy, and recently for the stability of the financial system. Tackling climate change requires urgent investments in the low-carbon energy transition. However, capital is not flowing at the pace and amount needed, exposing public and private investments to the risk of stranded assets. Central banks’ influence in the economy soared since 2008 but their role in the low-carbon transition has been mostly neglected so far. In this article, we display under which conditions central banks could contribute to meet the interlinked goals of sustainability and financial stability by influencing the timing and magnitude of the low-carbon transition. By further developing the EIRIN Stock-Flows Consistent, flow-of-funds behaviorual model, we simulate three scenarios, i.e. an unconditioned Quantitative Easing (QE), a green QE conditional to the purchase of green sovereign bonds, and conventional monetary policies. For each scenario, we analyze the impact on green investments and jobs, credit conditions, green/brown bonds market, and inequality across heterogeneous households and sectors, identifying main feedback loops and transmission channels. We find that, under the model’s conditions, a green QE promotes a faster development of the green bonds’ market, with positive spillovers on green investments, employment, commercial and central banks’ reserves, and on decreasing risk of stranded assets for the financial system. However, in all scenarios we find that wealth concentration in the credit sector and in the wealthiest household increases, with undesirable effects on income inequality, financial stability and aggregate demand.

Keywords: central banks, green Quantitative Easing, green sovereign bonds, Stock-Flows Consistency, financial stability, inequality

JEL Classification: E12, E58, E60, Q57, Q58

Suggested Citation

Monasterolo, Irene and Raberto, Marco, Is There a Role for Central Banks in the Low-Carbon Transition? A Stock-Flow Consistent Modelling Approach (November 21, 2017). Available at SSRN: https://ssrn.com/abstract=3075247 or http://dx.doi.org/10.2139/ssrn.3075247

Irene Monasterolo (Contact Author)

Utrecht University ( email )

Vredenburg 138
Utrecht, 3511 BG
Netherlands

Marco Raberto

Università degli Studi di Genova - DIME - Department of Mechanics, Energetics, Management and Transportation ( email )

Via Opera Pia 15
Genova
Italy

HOME PAGE: http://www.dime.unige.it/en/user/120

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