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Engaging Central Banks in Climate Change? The Mix of Monetary and Climate Policy

Chen, Chuanqi and Pan, Dongyang and Bleischwitz, Raimund and Huang, Zhigang (2020): Engaging Central Banks in Climate Change? The Mix of Monetary and Climate Policy.

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Given the recent debate on central banks’ role under climate change, this research theoretically investigates the mix of monetary and climate policy and provides some insights for central banks who are considering their engagement in the climate change issue. The “climate-augmented” monetary policy is pioneeringly proposed and studied. We build an extended Environmental Dynamic Stochastic General Equilibrium (E-DSGE) model as the method. By this model, we find the following results. First, the making process of monetary policy should consider the existing climate policy and environmental regulation. Second, the coefficients in traditional monetary policy can be better set to enhance welfare when climate policy is given. This provides a way to optimise the policy mix. Third, if a typical form climate target is augmented into the monetary policy rule, a dilemma could be created. This means that it has some risks for central banks to care for the climate proactively by using the narrow monetary policy. At the current stage, central banks could and should use other measures to help the climate and the financial stability.

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