Central Banks and Climate Policy: Unpleasant Trade–Offs? A Principal–Agent Approach

27 Pages Posted: 17 Jun 2022

See all articles by Donato Masciandaro

Donato Masciandaro

Bocconi University - Department of Economics; Bocconi University - Department of Economics (ECO)

Riccardo Russo

King’s Business School, King’s College London

Date Written: June 15, 2022

Abstract

This paper focuses on the trade–offs that central banks would face if they were to start tackling climate change. Disruptive natural events can hamper growth and capital accumulation, thereby affecting price and financial stability – elements for which central banks are responsible. Yet, the array of instruments they could use to mitigate climate–related risks overlap with those already used in relation to their monetary and macroprudential mandates. By leveraging a principal–agent setting, we consider the conditions under which the central bank architecture would be fit to take on this objective without jeopardising the attainment of central banks’ core mandates. We also examine the corresponding effects in terms of climate risks. Our results show that central banks’ effectiveness in this regard depends on the degree of their independence from governments’ climate preferences and on their ability to calibrate their “green” easing, either monetary and/or regulatory, on the realised level of abatement and emissions.

Keywords: monetary policy, macroprudential policy, fiscal policy, climate change, delegation, independence

JEL Classification: D02, E52, E58, E61, E63

Suggested Citation

Masciandaro, Donato and Russo, Riccardo, Central Banks and Climate Policy: Unpleasant Trade–Offs? A Principal–Agent Approach (June 15, 2022). BAFFI CAREFIN Centre Research Paper No. 2022-181, Available at SSRN: https://ssrn.com/abstract=4139124 or http://dx.doi.org/10.2139/ssrn.4139124

Donato Masciandaro (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Bocconi University - Department of Economics (ECO) ( email )

Via Gobbi 5
Milan, 20136
Italy

Riccardo Russo

King’s Business School, King’s College London ( email )

Bush House, 30 Aldwych
London, WC2B 4BG
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
261
Abstract Views
1,029
Rank
218,185
PlumX Metrics