Designing a green memorandum: central bankers, politicians, monetary policy, and macroprudential regulation

Georgios Chortareas, Donato Masciandaro and Riccardo Russo

Macroeconomic Dynamics, 2025, vol. 29, -

Abstract: Incorporating environmental aspects in monetary and macroprudential policies poses a series of questions in terms of central banks’ effectiveness, independence, neutrality, and legitimacy. Most analyses of this matter rely on a purely economic approach, underestimating the trade-offs it entails and thus being biased in favor of central banks’ interventions. We develop a political-economy setting based on a Walsh contract, which can be interpreted as a memorandum that the government and central bank can implement. Through it, the former legitimizes, or pushes for, the intervention of the latter under the aegis of an elected authority. This setting eliminates the bias, unveiling the trade-offs that could result: accounting for and tackling climate risks could lead central banks to miss their policy targets, not necessarily making “brown” firms greener, and result in welfare distortions. Yet, thanks to this memorandum, the possibility of a green transition favored by the central bank is made possible. We conclude that central banks should keep a cautious stance when deciding to enter the climate arena, and that different evaluations of these risks can be interpreted as a reason why central banks around the world have adopted different degrees of climate interventionism.

Date: 2025
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