Financial Intermediation and Climate Change in a Production and Investment Network Model for the Euro Area

Patrick Gruning and Zeynep Kantur
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Patrick Gruning: Latvijas Banka
Zeynep Kantur: Baskent University

No 2024/06, Working Papers from Latvijas Banka

Abstract: This paper introduces financial intermediaries, who engage in lending to firms for investments and buying public bonds issued by the government, and unconventional monetary policy in the form of quantitative easing or tightening into a rich New- Keynesian multi-sector E-DSGE model with production and investment networks. Due to the strong input-output linkages between sectors, almost all policies are found to be not effective in facilitating a green transition. The policies considered are sector-specific bank regulation policies, unconventional monetary policies, various carbon tax revenue recycling schemes, public green capital investment, and sector- specific investment tax/subsidy policies. Only if carbon tax revenues are used to build public green capital, thereby boosting productivity of the green sectors, the trade-off between achieving positive economic growth and reducing carbon emissions is fully resolved.

Keywords: Production network; Investment network; Climate change; Financial intermediation; Financial stability; Stranded assets; Monetary policy (search for similar items in EconPapers)
JEL-codes: E22 E32 E52 G21 L14 Q50 (search for similar items in EconPapers)
Date: 2024-11-14
New Economics Papers: this item is included in nep-cba, nep-dge, nep-eec, nep-ene, nep-env, nep-fdg and nep-net
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Persistent link: https://EconPapers.repec.org/RePEc:ltv:wpaper:202406

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