Greening Monetary Policy
25 Pages Posted: 19 Sep 2018 Last revised: 29 Dec 2019
Date Written: December 28, 2019
While there is increasing interest in decarbonising or greening monetary policy, central banks are keen to maintain market neutrality. But there is evidence that the market has a bias towards carbon-intensive companies. The paper develops a method to tilt the ECB’s asset and collateral framework towards low-carbon assets. We find that a modest tilting approach reduces carbon emissions in the ECB’s corporate and bank bond portfolio by over 40 per cent. It also lowers the cost of capital of low-carbon companies in comparison with high-carbon companies by 4 basis points. We show that a low carbon allocation can be done without undue interference with the transmission mechanism of monetary policy.
Keywords: Monetary Policy, Collateral, Central Bank, Eurosystem, Environmental Policy, ESG
JEL Classification: E52, E58, Q01, Q52, Q54
Suggested Citation: Suggested Citation