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Whatever it takes to save the planet? Central banks and unconventional green policy

Alessandro Ferrari () and Valerio Nispi Landi ()

No 1320, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We study the effects of a temporary Green QE, defined as a policy that temporarily tilts the central bank's balance sheet toward green bonds, i.e. bonds issued by firms in non-polluting sectors. To this purpose, we merge a standard DSGE framework with an environmental model, in which detrimental emissions increase the stock of pollution. Imperfect substitutability between green and brown bonds is a necessary condition for the effectiveness of Green QE. While a temporary Green QE is an effective tool in mitigating detrimental emissions, it has limited effects in reducing the stock of pollution, if pollutants, such as CO2, stay in the atmosphere for a long time. The welfare gains of Green QE are positive but small. Welfare gains are larger if the flow of emissions negatively affects the utility of households.

Keywords: central bank; monetary policy; quantitative easing; climate change (search for similar items in EconPapers)
JEL-codes: E52 E58 Q54 (search for similar items in EconPapers)
Date: 2021-02
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ene, nep-env, nep-mac and nep-mon
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