10 January 2024

The Effects of a Green Monetary Policy on Firms Financing Cost

The monetary policy operations of a central bank (CB) involve allocation decisions when purchasing assets and taking collateral. A green monetary policy aims to steer or tilt the allocation of assets and collateral toward low-carbon industries, to reduce the cost of capital for these sectors in comparison to high-carbon ones. Starting from a corporate bonds purchase program (e.g., CSPP) that follows a carbon-neutral monetary policy, we analyze how a shift in the CB portfolio allocation toward bonds issued by low-carbon companies can favor green firms in the market. Relying on optimal portfolio theory, we study how the CB might include the risk related to the environmental sustainability of firms in its balance sheet. In addition, we analyze the interactions between the neutral or green CB re-balancing policy and the evolutionary choice (i.e., by means of exponential replicator dynamics) of a population of firms that can decide to be green or not according to bonds borrowing cost.

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April 9th, 2024 | Nicolás Aguila and Joscha Wullweber

How the ECB Legitimises Its Green Monetary Policy

The European Central Bank has made a commitment to consider climate change when making monetary policy decisions. But why and how should it do this? Nicolás Aguila and Joscha Wullweber examine how the narratives used by the ECB to justify its approach have changed over time and assess the impact this could have on the central bank’s green monetary policies.