Endogenous money, green finance and central bank power

Basil Oberholzer

Chapter 3 in Central Banking, Monetary Policy and the Environment, 2022, pp 72-89 from Edward Elgar Publishing

Abstract: The mainstream approach to green finance considers private financial institutions as essential agents to enable a smooth transformation to a sustainable economy. This narrative where money is supposed to be withdrawn from environmentally harmful assets in order to be shifted to green investment projects is implicitly based on a conception of exogenous money. However, in a world of money being created endogenously by the banking system a shift of funds does not per se reduce the financing of environmental pollution. This chapter criticizes the mainstream idea of green finance and considers whether the central bank is able to make a difference where private banks cannot. It argues that while private financial institutions are ineffective in steering the green transformation due to the endogeneity of money, it is precisely endogenous money, which enables monetary policy to foster ecological sustainability. In the end however, for monetary policy to be successful in driving green investment, it has to be embedded in a comprehensive framework of economic and environmental policies as well as large-scale public investment.

Keywords: Economics and Finance (search for similar items in EconPapers)
Date: 2022
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