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  5. Climate Change, Green Finance and Central Banking
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Climate Change, Green Finance and Central Banking

Paper Session

Friday, Jan. 6, 2023 8:00 AM - 10:00 AM (CST)

New Orleans Marriott, Galerie 5
Hosted By: Central Bank Research Association
  • Chair: Galina Hale, University of California-Santa Cruz

Climate Policy, Financial Frictions, and Transition Risk

Garth Heutel
,
Georgia State University
Stefano Carattini
,
Georgia State University
Givi Melkadze
,
Georgia State University

Abstract

We study climate and macroprudential policies in an economy with financial frictions. Using a dynamic stochastic general equilibrium model featuring both a pollution market failure and a market failure in the financial sector, we explore transition risk – whether ambitious climate policy can lead to macroeconomic instability. It can, but the risk can be alleviated through macroprudential policies – taxes or subsidies on banks’ assets. Then, we explore efficient climate and macroprudential policy in the long run and over business cycles. The presence of financial frictions affects the steady-state value and dynamic properties of the efficient carbon tax. A policy portfolio with both a carbon tax and macroprudential policies yields the efficient outcome.

Climate Stress Testing

Hyeyoon Jung
,
Federal Reserve Bank of New York
Robert F. Engle
,
New York University
Richard Berner
,
New York University

Abstract

Climate change could impose systemic risks upon the financial sector, either via disruptions of economic activity resulting from the physical impacts of climate change or changes in policies as the economy transitions to a less carbon-intensive environment. We develop a stress testing procedure to test the resilience of financial institutions to climate-related risks. Specifically, we introduce a measure called CRISK, systemic climate risk, which is the expected capital shortfall of a financial institution in a climate stress scenario. We use the measure to study the climate-related risk exposure of large global banks in the collapse in fossil-fuel prices in 2020.

Climate Change Mitigation: How Effective is Green Quantitative Easing?

Raphael Abiry
,
Goethe University Frankfurt
Marien Ferdinandusse
,
European Central Bank
Alexander Ludwig
,
University of Frankfurt
Carolin Nerlich
,
European Central Bank

Abstract

We develop a two sector integrated assessment model with incomplete markets to analyze the effectiveness of green quantitative easing (QE) in complementing fiscal policies for climate change mitigation. We model green QE through a given outstanding stock of private assets held by a monetary authority and its portfolio allocation between a clean (green) and a dirty (brown) sector of production. Our findings show that green QE by only partially crowding out private capital in the green sector contributes to a reduction of the global temperature by 0.04 degrees of Celsius in 2100. Since green QE only indirectly affects the allocation of production and since its impact is capped by the asset holdings of the monetary authority, a moderate global carbon tax of 50 USD is 4.3 times more effective. Yet, green QE can usefully complement carbon taxation, in particular if governments only insufficiently coordinate on implementing green fiscal policies.

The Expectations Channel of Climate Change: Implications for Monetary Policy

Alexander Dietrich
,
University of Tuebingen
Gernot J. Müller
,
University of Tuebingen
Raphael Schoenle
,
Brandeis University

Abstract

We measure expectations about the short-run economic impact of climate change in a representative survey of US consumers. Respondents expect not much of an impact on GDP growth, but perceive a high probability of costly, rare disasters---suggesting they are salient of climate change. Furthermore, expectations vary systematically with socioeconomic characteristics, media consumption, various information treatments and over time. We calibrate a New Keynesian model to key results of the survey and spell out two implications for monetary policy. First, climate-change related disaster expectations lower the natural rate of interest substantially. Second, time-variation in disaster expectations contributes to cyclical fluctuations.
JEL Classifications
  • G2 - Financial Institutions and Services
  • E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit