Green Targeted Lending Operations in the Euro Area

Abstract

In this paper, we construct a Dynamic Stochastic General Equilibrium (DSGE) model to examine the implications of dual rates for green lending. We demonstrate that implementing a distinct interest rate for banks engaged in green lending can effectively mitigate transition risks while channelling more capital towards green production sectors and firms for an immediate cut of emissions and net zero emission economy targets.

Keywords: Dual rates Optimal policy, Transition risk