2020/19 | LEM Working Paper Series | ||||||||||||||||
Taking up the climate change challenge: a new perspective on central banking |
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Paola D'Orazio and Lilit Popoyan |
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Keywords | |||||||||||||||||
Central banking; Policy mandate; Macroprudential policy; Central bank
governance; Climate change.
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JEL Classifications | |||||||||||||||||
G28, E58, Q54, Q56, Q58
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Abstract | |||||||||||||||||
The awareness about climate-related financial risks is gaining momentum both in
the policy and academic debates. The role of countries’ institutional dimension and
central bank governance structures in the adoption of green prudential regulation is,
however, overlooked in the current discussion. The paper fills this gap by
proposing an analysis of the state-of-the-art, challenges and perspectives, of ''green'' central
banking. The study complements existing research that usually points to an ''extended''
monetary policy mandate, including, for example, sustainability objectives
or green growth, as the primary motivation for a central bank to engage in ''green''
financial policymaking. According to our research, the decision to implement green
regulations is not exclusively related to the mandate per se, but on the central bank's
independence and on how the interaction between the monetary and prudential policy
is structured. Moreover, the higher exposure to climate-related adverse events also
plays a crucial role in the adoption of green prudential regulations. To avoid potential
conflicts between monetary policy and green prudential regulation caused by existing
intertwined transmission mechanisms, on the one hand, our analysis emphasizes the
importance of having a central bank that hosts the green prudential regulation under
its governance roof. On the other hand, when the ''green'' governance models studied
in the paper are in place, the Tinbergen principle is safeguarded.
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