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

49 Pages Posted: 14 Dec 2020

See all articles by Alessandro Ferrari

Alessandro Ferrari

Bank of Italy - Economic Outlook and Monetary Policy Directorate

Valerio Nispi Landi

Bank of Italy

Multiple version iconThere are 2 versions of this paper

Date Written: December, 2020

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 non-polluting sectors. To this purpose, we merge a standard DSGE framework with an environmental model. In our model, detrimental emissions produced by the brown sector increase the stock of pollution. We find that the imperfect substitutability between green and brown bonds is a necessary condition for the effectiveness of Green QE. Under the assumption of imperfect substitutability, we point out the following results. A temporary Green QE is an effective tool in mitigating detrimental emissions. However, Green QE has limited effects in reducing the stock of pollution, if pollutants are slow-moving variables such as atmospheric carbon. The welfare gains of Green QE are positive but small. Welfare gains increase if the flow of emissions negatively affects also the utility of households.

JEL Classification: E52, E58, Q54

Suggested Citation

Ferrari, Alessandro and Nispi Landi, Valerio, Whatever it Takes to Save the Planet? Central Banks and Unconventional Green Policy (December, 2020). ECB Working Paper No. 20202500, Available at SSRN: https://ssrn.com/abstract=3748330 or http://dx.doi.org/10.2139/ssrn.3748330

Alessandro Ferrari (Contact Author)

Bank of Italy - Economic Outlook and Monetary Policy Directorate ( email )

Via Nazionale 91
Rome, 00184
Italy
06 4792 2973 (Phone)

HOME PAGE: http://sites.google.com/site/alessandroferrariecon/home

Valerio Nispi Landi

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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