Toward green central banking: Proposing an augmented Taylor rule

Fredj Jawadi, Philippe Rozin and Abdoulkarim Idi Cheffou

Energy Economics, 2024, vol. 134, issue C

Abstract: This study explores the greening of the Federal Reserve monetary policy from January 2000 to August 2023. We discuss the challenges inherent in the US central bank's pursuit of an alternative monetary policy to deal with its main mission of price stability while also taking climate change into account, and propose an augmented green Taylor rule. In particular, we reconsider the Taylor rule model while allowing the Fed to conduct its monetary policy, taking both physical and transition risks into account. To our knowledge, this is the first study on the sensitivity of monetary instruments and monetary policy with respect to physical and transition risks. Our analysis yields two interesting findings. First, Fed's greening of US monetary policy appears feasible, as taking the climate risk factors into account in formulating the policy is not out of step with the main price stability mandate and could yield a climate risk premium. Accordingly, the climate risk measure related to transition and physical risk drives the federal funds rate, and an augmented green Taylor rule would fit the data better than the basic Taylor rule. Second, we find that the Fed's reaction to news related to transition and physical risks in particular and climate risk in general has been more pronounced since the post COVID-19 subperiod than over the period as a whole.

Keywords: New central banking; Interest rate; Augmented green Taylor rule; Physical risk; Transition risk; In-sample forecast (search for similar items in EconPapers)
JEL-codes: C20 E43 E52 E58 Q43 Q50 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:134:y:2024:i:c:s0140988324002470

DOI: 10.1016/j.eneco.2024.107539

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