From Market to Green Economics: Impact on Monetary and Financial Policies

Abstract

The ECB has already set the step from ‘a monetary policy rule’ towards a broad central bank with monetary and financial tasks. The next step is to green these monetary and financial stability tasks. This chapter argues that a change from the prevailing ‘market economics’ paradigm to a ‘green economics’ paradigm will make this transformation effective. Sustainability challenges are complex in nature and have a long horizon.

On the financial side, the ECB should ‘de-risk the financial system’ by greening its financial stability and supervision tasks. This chapter provides an overview of the new financial instruments and their application by the ECB. On the monetary side, the ECB is still adopting a two-pronged strategy: a risk approach and an allocational approach. While the risk approach fits within market economics thinking, the green economics paradigm suggests an allocational approach whereby the ECB moves from high-carbon to low carbon assets in its monetary policy operations. The allocational approach is gaining ground.

Keywords: Central banking, sustainability, monetary policy, financial stability, financial supervision

JEL Classification: E50, E58, G01, G28, H23