Climate Change and Monetary Policy in the Euro Area

193 Pages Posted: 23 Sep 2021 Last revised: 18 Nov 2021

See all articles by Francesco Drudi

Francesco Drudi

European Central Bank (ECB)

Emanuel Moench

Deutsche Bundesbank; Goethe University Frankfurt - Department of Money and Macroeconomics

Cornelia Holthausen

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Pierre-François Weber

Bank of France

Gianluigi Ferrucci

European Central Bank (ECB)

Ralph Setzer

European Central Bank (ECB)

Virginia Di Nino

European Central Bank (ECB)

Francesca Barbiero

European Central Bank (ECB)

Donata Faccia

European Central Bank (ECB); Trinity College (Dublin)

Andreas Breitenfellner

Oesterreichische Nationalbank (OeNB)

Ivan Faiella

Bank of Italy

Mátyás Farkas

European Central Bank (ECB)

maurice bun

De Nederlandsche Bank

Fabio Fornari

European Central Bank (ECB)

Matteo Ciccarelli

European Central Bank (ECB)

Matthieu Darracq Paries

European Central Bank (ECB)

Alessandro Giovannini

European Central Bank (ECB) - Directorate General International and European Relations

Niki Papadopoulou

Central Bank of Cyprus

Miles Parker

European Central Bank (ECB)

Filippos Petroulakis

European Central Bank (ECB)

Gerbert Hebbink

De Nederlandsche Bank

Anamaria Piloiu

Goethe University Frankfurt

Sarah Jane Hlásková

European Central Bank (ECB)

Gasper Ploj

University of Bonn

Alexander A. Popov

European Central Bank (ECB)

Daniel Kapp

European Central Bank (ECB)

Paloma Lopez-Garcia

European Central Bank (ECB)

Matija Lozej

European Central Bank (ECB); Central Bank of Ireland; University of Primorska

Reamonn Lydon

Central Bank of Ireland

Otso Manninen

Suomen Panki

Madelaine Roos

European Central Bank (ECB)

Andrés Manzanares

European Central Bank (ECB)

Daniel Santabárbara

European Central Bank (ECB)

Guido Schotten

De Nederlandsche Bank

Katri Mikkonen

European Central Bank (ECB)

Beatriz Sotomayor

European Central Bank (ECB)

Livio Stracca

European Central Bank (ECB)

Francesco Paolo Mongelli

European Central Bank (ECB); Goethe University Frankfurt

Carlos Montes-Galdón

European Central Bank (ECB)

Georg Müller

European Central Bank (ECB)

Carolin Nerlich

European Central Bank (ECB) - Directorate General Economics

Malgorzata Osiewicz

European Central Bank (ECB)

Lia Vaz Cruz

European Central Bank (ECB)

Adrian Page

European Central Bank (ECB)

Aris Avgousti

Central Bank of Cyprus

Arturo Diez-Caballero

European Central Bank (ECB)

Jana Aubrechtova

European Central Bank (ECB)

Alberto Fuertes Mendoza

Banco de España

Mar Delgado Téllez

Banco de España

Patrick Grüning

Latvijas Banka; Vilnius University - Faculty of Economics and Business Administration

Pablo Garcia-Sanchez

Banque Centrale du Luxembourg

Lorenzo Isgro

European Central Bank (ECB)

Giovanna Bua

European Central Bank (ECB)

Mélissa Kasongo Kashama

National Bank of Belgium

Ricardo Queiroz

European Central Bank (ECB)

Lavinia Rognone

Alliance Manchester Business School, University of Manchester; European Central Bank (ECB)

Oke Röhe

Deutsche Bundesbank

Niall McInerney

Central Bank of Ireland

Christoph Meinerding

Deutsche Bundesbank

Pinelopi Tsalaporta

National and Kapodistrian University of Athens

Jan Willem van den End

De Nederlandsche Bank

Anastasia Theofilakou

Bank of Greece

Mark Weth

Deutsche Bundesbank

Boris Osorno-Torres

European Central Bank (ECB)

Jean-François Ouvrard

Banque de France

Date Written: September, 2021

Abstract

This paper analyses the implications of climate change for the conduct of monetary policy in the euro area. It first investigates macroeconomic and financial risks stemming from climate change and from policies aimed at climate mitigation and adaptation, as well as the regulatory and fiscal effects of reducing carbon emissions. In this context, it assesses the need to adapt macroeconomic models and the Eurosystem/ECB staff economic projections underlying the monetary policy decisions. It further considers the implications of climate change for the conduct of monetary policy, in particular the implications for the transmission of monetary policy, the natural rate of interest and the correct identification of shocks. Model simulations using the ECB’s New Area-Wide Model (NAWM) illustrate how the interactions of climate change, financial and fiscal fragilities could significantly restrict the ability of monetary policy to respond to standard business cycle fluctuations. The paper concludes with an analysis of a set of potential monetary policy measures to address climate risks, insofar as they are in line with the ECB’s mandate.

Keywords: climate change, environmental economics, green finance, monetary policy, sustainable growth economics

JEL Classification: E52, E58, Q54

Suggested Citation

Drudi, Francesco and Moench, Emanuel and Holthausen, Cornelia and Weber, Pierre-François and Ferrucci, Gianluigi and Setzer, Ralph and Nino, Virginia Di and Barbiero, Francesca and Faccia, Donata and Breitenfellner, Andreas and Faiella, Ivan and Farkas, Mátyás and bun, maurice and Fornari, Fabio and Ciccarelli, Matteo and Darracq Paries, Matthieu and Giovannini, Alessandro and Papadopoulou, Niki and Parker, Miles and Petroulakis, Filippos and Hebbink, Gerbert and Piloiu, Anamaria and Hlásková, Sarah Jane and Ploj, Gasper and Popov, Alexander A. and Kapp, Daniel and Lopez-Garcia, Paloma and Lozej, Matija and Lozej, Matija and Lydon, Reamonn and Manninen, Otso and Roos, Madelaine and Manzanares, Andrés and Santabárbara, Daniel and Schotten, Guido and Mikkonen, Katri and Sotomayor, Beatriz and Stracca, Livio and Mongelli, Francesco Paolo and Montes-Galdón, Carlos and Müller, Georg and Nerlich, Carolin and Osiewicz, Malgorzata and Cruz, Lia Vaz and Page, Adrian and Avgousti, Aris and Diez-Caballero, Arturo and Aubrechtova, Jana and Mendoza, Alberto Fuertes and Téllez, Mar Delgado and Grüning, Patrick and Garcia-Sanchez, Pablo and Isgro, Lorenzo and Bua, Giovanna and Kashama, Mélissa Kasongo and Queiroz, Ricardo and Rognone, Lavinia and Röhe, Oke and McInerney, Niall and Meinerding, Christoph and Tsalaporta, Pinelopi and van den End, Jan Willem and Theofilakou, Anastasia and Weth, Mark and Osorno-Torres, Boris and Ouvrard, Jean-François, Climate Change and Monetary Policy in the Euro Area (September, 2021). ECB Occasional Paper No. 2021271, Available at SSRN: https://ssrn.com/abstract=3928292 or http://dx.doi.org/10.2139/ssrn.3928292

Francesco Drudi (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Emanuel Moench

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany
+49 69 95662312 (Phone)

HOME PAGE: http://https://www.bundesbank.de/en/emanuel-moench

Goethe University Frankfurt - Department of Money and Macroeconomics ( email )

Germany

Cornelia Holthausen

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 6490 (Phone)
+49 69 1344 855 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Pierre-François Weber

Bank of France ( email )

Paris
France

Gianluigi Ferrucci

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Ralph Setzer

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Virginia Di Nino

European Central Bank (ECB)

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Francesca Barbiero

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Donata Faccia

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Trinity College (Dublin) ( email )

D2
Ireland

Andreas Breitenfellner

Oesterreichische Nationalbank (OeNB) ( email )

Otto-Wagner-Platz 3, PO Box 61
Vienna,
1010 Vienna, A-1011
Austria

Ivan Faiella

Bank of Italy ( email )

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00184 Roma
Italy

Mátyás Farkas

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Maurice Bun

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Fabio Fornari

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Matteo Ciccarelli

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Matthieu Darracq Paries

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+496913446631 (Phone)
+496913447604 (Fax)

Alessandro Giovannini

European Central Bank (ECB) - Directorate General International and European Relations ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Niki Papadopoulou

Central Bank of Cyprus ( email )

80 Kennedy Ave
1076 Nicosia
Cyprus

Miles Parker

European Central Bank (ECB)

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Filippos Petroulakis

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

HOME PAGE: http://sites.google.com/site/filippospetroulakis/

Gerbert Hebbink

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Anamaria Piloiu

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Sarah Jane Hlásková

European Central Bank (ECB)

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Gasper Ploj

University of Bonn

Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012
Germany

Alexander A. Popov

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Daniel Kapp

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Paloma Lopez-Garcia

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Matija Lozej

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Central Bank of Ireland ( email )

Dame Street
Dublin, 2
Ireland

University of Primorska ( email )

Glagoljaska 8
Koper, SI-6000
Slovenia

Reamonn Lydon

Central Bank of Ireland

P.O. Box 559
Dame Street
Dublin, 2
Ireland

Otso Manninen

Suomen Panki ( email )

Madelaine Roos

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Andrés Manzanares

European Central Bank (ECB)

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Daniel Santabárbara

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Guido Schotten

De Nederlandsche Bank

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Katri Mikkonen

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Beatriz Sotomayor

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Livio Stracca

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

Francesco Paolo Mongelli

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Carlos Montes-Galdón

European Central Bank (ECB)

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Georg Müller

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Carolin Nerlich

European Central Bank (ECB) - Directorate General Economics ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Malgorzata Osiewicz

European Central Bank (ECB)

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Lia Vaz Cruz

European Central Bank (ECB)

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Adrian Page

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Aris Avgousti

Central Bank of Cyprus ( email )

80 Kennedy Ave
1076 Nicosia
Cyprus

Arturo Diez-Caballero

European Central Bank (ECB)

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Jana Aubrechtova

European Central Bank (ECB)

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Alberto Fuertes Mendoza

Banco de España

Alcala 50
Madrid 28014
Spain

Mar Delgado Téllez

Banco de España

Alcala 50
Madrid 28014
Spain

Patrick Grüning

Latvijas Banka ( email )

Riga
Latvia

Vilnius University - Faculty of Economics and Business Administration ( email )

Sauletekio al. 9 (II building)
Vilnius, LT-10222
Lithuania

HOME PAGE: http://www.evaf.vu.lt/en/

Pablo Garcia-Sanchez

Banque Centrale du Luxembourg

2, boulevard Royal
Luxembourg, L-2983
Luxembourg

Lorenzo Isgro

European Central Bank (ECB)

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Giovanna Bua

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Mélissa Kasongo Kashama

National Bank of Belgium

Brussels, B-1000
Belgium

Ricardo Queiroz

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Lavinia Rognone

Alliance Manchester Business School, University of Manchester ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

HOME PAGE: http://https://www.research.manchester.ac.uk/portal/lavinia.rognone.html

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Oke Röhe

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Niall McInerney

Central Bank of Ireland ( email )

P.O. Box 559
Dame Street
Dublin, 2
Ireland

Christoph Meinerding

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Pinelopi Tsalaporta

National and Kapodistrian University of Athens

5 Stadiou Strt
Athens, 12131
Greece

Jan Willem van den End

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Anastasia Theofilakou

Bank of Greece

21 E. Venizelos Avenue
GR 102 50 Athens
Greece

Mark Weth

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Boris Osorno-Torres

European Central Bank (ECB)

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Jean-François Ouvrard

Banque de France ( email )

Paris
France

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