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Emission-based Interest Rates and the Transition to a Low-carbon Economy

Florian Böser () and Chiara Colesanti Senni

No 20/337, CER-ETH Economics working paper series from CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich

Abstract: We use a dynamic general equilibrium model to study a climate-oriented monetary policy in the form of emission-based interest rates set by the central bank. Liquidity costs of banks increase with the emission intensity of their asset portfolio, leading banks to favor low-carbon assets and to improve the financing conditions for clean sectors. We show that such a monetary policy supports the decarbonization of the economy and reduces climate damage, as more resources are channeled to low-carbon sectors and incentives to adopt cleaner technologies increase across all sectors. We illustrate these effects by calibrating our model to data for the Euro Area.

Keywords: climate change; monetary policy; banks; innovation; financial stability (search for similar items in EconPapers)
JEL-codes: E42 E52 E58 O44 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2020-06
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ene, nep-env and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:eth:wpswif:20-337

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