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Climate Change, Financial Stability and Monetary Policy

Yannis Dafermos (), Maria Nikolaidi () and Giorgos Galanis

Ecological Economics, 2018, vol. 152, issue C, 219-234

Abstract: Using a stock-flow-fund ecological macroeconomic model, we analyse (i) the effects of climate change on financial stability and (ii) the financial and global warming implications of a green quantitative easing (QE) programme. Emphasis is placed on the impact of climate change damages on the price of financial assets and the financial position of firms and banks. The model is estimated and calibrated using global data and simulations are conducted for the period 2016–2120. Four key results arise. First, by destroying the capital of firms and reducing their profitability, climate change is likely to gradually deteriorate the liquidity of firms, leading to a higher rate of default that could harm both the financial and the non-financial corporate sector. Second, climate change damages can lead to a portfolio reallocation that can cause a gradual decline in the price of corporate bonds. Third, climate-induced financial instability might adversely affect credit expansion, exacerbating the negative impact of climate change on economic activity. Fourth, the implementation of a green corporate QE programme can reduce climate-induced financial instability and restrict global warming. The effectiveness of this programme depends positively on the responsiveness of green investment to changes in bond yields.

Keywords: Ecological macroeconomics; Stock-flow consistent modelling; Climate change; Financial stability; Green quantitative easing (search for similar items in EconPapers)
JEL-codes: E12 E44 E52 Q54 (search for similar items in EconPapers)
Date: 2018
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Working Paper: Climate change, financial stability and monetary policy (2018) Downloads
Working Paper: Climate change, financial stability and monetary policy (2017) Downloads
Working Paper: Climate change, financial stability and monetary policy (2017) Downloads
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