Monetary Policy Trade-Offs for the Green Transition
A Theoretical Approach
DOI:
https://doi.org/10.63207/vbhtze55Keywords:
Central Banks, Green Monetary Policy, Monetary Policy, SeigniorageAbstract
This paper develops a theoretical model to analyze how monetary policy can support the green transition when the central bank is not fully independent. A government spending function combines three financing channels—taxation, deficit-financing money creation, and targeted “green” monetary accommodation—capturing the institutional tension between climate objectives and price stability. The model shows that the inflationary impact of green monetary accommodation differs from ordinary seigniorage and depends critically on the central bank’s credibility. When credibility is high, green accommodation can lower the effective cost of credit and foster low-carbon investment with only modest inflationary effects. When credibility is weak, its inflationary consequences converge to those of traditional seigniorage and the incentive to use it as disguised deficit financing strengthens. The results suggest that policymakers should strengthen central-bank mandates and communication strategies to preserve credibility, coordinate climate investment with transparent fiscal tools, and develop standardized data on green interventions so that future empirical evaluations can guide the design of sustainable monetary frameworks.
Downloads
References
ACEMOGLU, Daron and James A. ROBINSON (2013). Why nations fail: The origins of power, prosperity and poverty. Profile Books.
BARRO, R. J. and D. B. Gordon (1983). “A Positive Theory of Monetary Policy in a Natural-Rate Model.” Journal of Political Economy. 91/4; pp 589-610
BONEVA, Lena; Gianluigi FERRUCCI; and Francesco P. MONGELLI (2021). “To be or not to be “green”: how can monetary policy react to climate change?.” ECB Occasional Paper Series. No. 285, November. Available at https://ssrn.com/abstract=3971287
BRAINARD, Lael (2021). “Building Climate Scenario Analysis on the Foundations of Economic Research.” 2021 Federal Reserve Stress Testing Research Conference. Federal Reserve Bank of Boston. Available at https://www.federalreserve.gov/newsevents/speech/brainard20211007a.htm
CARATTINI, Stefano; Garth HEUTEL; and Givi MELKADZE (2021). “Climate Policy, Financial Frictions and Transition Risk.” NBER Working Paper Series. Working Paper 28525. March. Available at http://www.nber.org/papers/w28525
COMISIÓN ECONÓMICA PARA AMÉRICA LATINA Y EL CARIBE (CEPAL) (2023), “Estudio Económico de América Latina y el Caribe 2023. El financiamiento de una transición sostenible: inversión para crecer y enfrentar el cambio climático.” Cap. 4. Available at https://repositorio.cepal.org/server/api/core/bitstreams/4a7c3fb9-83f3-45e3-94e1-35318fa65fbd/content
CROISSANT Y., Millo G. (2008). “Panel Data Econometrics in R: The plm Package.” Journal of Statistical Software. 27(2), 1-43 Available at doi:10.18637/jss.v027.i02.
CULLEN, Jay (2023). “Central Banks and Climate Change: Mission Impossible?” Journal of Financial Regulation. 9, pp174-209. Available at https://doi.org/10.1093/jfr/fjad003
D’ORAZIO, Paola and Lilit POPOYAN (2022). “Realising Central Banks’ Climate Ambitions Through Financial Stability Mandates.” Green Monetary Policy. Available at doi:10.1007/s10272-022-1039-4
D’ORAZIO, Paola and Lilit POPOYAN (2023). “Do monetary policy mandates and financial stability governance structures matter for the adoption of climate-related financial policies?” International Economics. Vol. 173, pp284–295 Available at https://doi.org/10.1016/j.inteco.2023.01.004
DEL NEGRO, Marco, Julian DI GIOVANI and Keshav DOGRA (2023). “Is the Green Transition Inflationary?” Staff Reports, No. 1053, February. Federal Reserve Bank of New York. Available at https://ssrn.com/abstract=4359216
DIKAU, Simon and Ulrich VOLZ (2018). “Central Banking, Climate Change and Green Finance”. ADBI Working Paper Series. Working Paper 867. September. Available at https://www.adb.org/publications/central-banking-climate-change-and-green-finance
ELIET-DOILLET, Alice and Andrea MAINO (2023). “Can Unconventional Monetary Policy Contribute to Climate Action?” Swiss Finance Institute Research Paper Series. No. 22-35 Available at http://dx.doi.org/10.2139/ssrn.4090616
FERRARI, Alessandro and Valerio N. LANDI (2020). “Whatever it takes to save the planet? Central banks and unconventional green policy.” ECB Working Paper Series. Working Paper 2500. December. Available at http://dx.doi.org/10.2139/ssrn.3748330
FERRARI, Alessandro and Valerio N. LANDI (2022). “Will the green transition be inflationary? Expectations matter.” ECB Working Paper Series. Working Paper 2726. September. Available at https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2726~3e04b5ba5d.en.pdf
GERTLER, Mark and Peter KARADI (2011). “A model of unconventional monetary policy.” Journal of Monetary Economics, Vol. 58 Issue 1, pp17–34. Available at doi:10.1016/j.jmoneco.2010.10.004
HOLLAND, Stephen P. (2010). “Spillovers from Climate Policy.” NBER Working Paper Series. Working Paper 16158. Available at http://www.nber.org/papers/w16158
JAUMOTTE, Florence; Weifeng LIU; and Warwick J. MCKIBBIN (2021). “Mitigating Climate Change: Growth-Friendly Policies to Achieve Net Zero Emissions by 2050.” IMF Working Papers. WP/21/195. Available at https://doi.org/10.5089/9781513592978.001
MASCIANDARO, Donato and Riccardo RUSSO (2022). “Central Banks and climate policy: Unpleasant trade–offs? A principal–agent approach.” Bocconi Working Paper Series, No. 181 Available at https://ssrn.com/abstract=4139124
MASCIANDARO, Donato and Riccardo RUSSO (2023). “Central Banks and climate policy: Unpleasant trade–offs? A principal–agent approach.” SSRN. Available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4418651
ORPHANIDES, Athanasios (2013). “Is Monetary Policy Overburdened?” Navigating the Great Recession: what role for monetary policy? Twelfth BIS Annual Conference, Lucerne, 20-21 June 2013. Available at https://www.bis.org/events/conf130620/orphanides.pdf
PAPOUTSI, Melina; Monika PIAZZESI; and Martin SCHNEIDER (2022) “How Unconventional is Green Monetary Policy?” March. Available at https://web.stanford.edu/~piazzesi/How_unconventional_is_green_monetary_policy.pdf
PFISTER, Christian and Natacha VALLA (2021). “Financial Stability Is Easier to Green Than Monetary Policy.” Green Monetary Policy. Available at doi:10.1007/s10272-021-0972-y
PINDYCK, Robert S. (2015). “The Use and Misuse of Models for Climate Policy”. NBER Working Paper Series. Working Paper 21097. Available at http://www.nber.org/papers/w21097
POPOYAN, Lilit and Giorgos GALANIS (2022). “Mind the gap: Monetary policy and financial regulations for supporting Green Finance.” Central Banking, Monetary Policy and the Environment, pp234–254. Available at https://doi.org/10.4337/9781800371958.00019
SCHNABEL, Isabel (2021). “Climate Change and Monetary Policy.” Finance & Development. pp 53-55. September. Available at https://www.imf.org/en/Publications/fandd/issues/2021/09/isabel-schnabel-ECB-climate-change
SCHOENMAKER, Dirk (2021). “Greening Monetary Policy.” Climate Policy. 21:4, pp581-592. Available at https://doi.org/10.1080/14693062.2020.1868392
SPYROMITROS, Eleftherios (2021). “Determinants of Green Innovation: The Role of Monetary Policy and Central Bank Characteristics.” Sustainability. 15, 7907. Available at https://doi.org/10.3390/su15107907
STEFFEN, Bjarne (2021). “A comparative analysis of green financial policy output in OECD countries.” Environmental Research Letters. 16, 074031 Available at https://doi.org/10.1088/1748-9326/ac0c43
TINBERGEN, Jan (1956). Economic Policy: Principles and Design. Amsterdam: North-Holland.
WALSH, Carl E. (2017). Monetary theory and policy. MIT Press.
Downloads
Published
Issue
Section
License
Copyright (c) 2026 Mateo Luis Rubio, Ángel Enrique Neder (Autor/a)
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
Usted es libre de:
- Compartir — copiar y redistribuir el material en cualquier medio o formato
- Adaptar — remezclar, transformar y construir a partir del material
- La licenciante no puede revocar estas libertades en tanto usted siga los términos de la licencia
Bajo los siguientes términos:
- Atribución — Usted debe dar crédito de manera adecuada , brindar un enlace a la licencia, e indicar si se han realizado cambios . Puede hacerlo en cualquier forma razonable, pero no de forma tal que sugiera que usted o su uso tienen el apoyo de la licenciante.
- NoComercial — Usted no puede hacer uso del material con propósitos comerciales .
- CompartirIgual — Si remezcla, transforma o crea a partir del material, debe distribuir su contribución bajo la la misma licencia del original.
- No hay restricciones adicionales — No puede aplicar términos legales ni medidas tecnológicas que restrinjan legalmente a otras a hacer cualquier uso permitido por la licencia.
-
