Monetary policy for the green transition

Luca Fornaro, Veronica Guerrieri and Lucrezia Reichlin

No 160 in BIS Papers from Bank for International Settlements

Abstract: This report explores the interplay between monetary policy and investments in clean and dirty technologies, contributing to the underexplored macroeconomic dynamics of the medium run. It focuses on the implications of a legislator-defined path for carbon emissions reductions on monetary policy, without addressing optimal green regulation design or deriving the optimal monetary policy for the green transition-leaving these for future research. This work represents a step forward in understanding the macroeconomic challenges of transitioning to a greener economy and the role monetary policy can play in supporting this transformation. The report highlight the critical role of monetary policy in influencing investment decisions between clean and dirty technologies during the green transition. It demonstrates that monetary policy interacts with a legislator-defined carbon emissions reduction path, shaping the macroeconomic environment for green investments. The report provides novel empirical evidence that supports these findings and uses a theoretical framework to analyse how monetary policy can either facilitate or hinder the transition to a greener economy. While the report does not derive an optimal monetary policy or explore the design of green regulations, it underscores the importance of aligning monetary policy with long-term environmental goals. Additionally, it identifies gaps in the literature and suggests promising avenues for future research on monetary policy's role in supporting sustainable economic transitions.

Date: 2025 Written 2025-09
ISBN: 978-92-9259-875-4
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