Can Green Transition Only Thrive with Price Stability?

William Ginn, Jamel Saadaoui and Evangelos Salachas

MPRA Paper from University Library of Munich, Germany

Abstract: We investigate how the European Central Bank (ECB) and the US Federal Reserve (Fed) re-spond to climate-related shocks, assessing whether the green transition can advance without compromising price stability. Using data from 2000 to 2025 and employing time-varying local projection (TVP-LP) models, we examine the monetary policy reactions to both physical and transition climate risks. Our results show that physical shocks, such as extreme weather events and natural disasters, exert stronger and more inflationary effects on monetary policy than tran-sition shocks related to decarbonization and climate policy. The ECB systematically tightens policy in response to physical shocks, viewing them as supply-side disturbances that threaten price stability, while the Fed’s response is more state-dependent and event-driven, loosening policy during crises like Hurricane Katrina but tightening in the post-COVID inflationary peri-od. For transition risks, both central banks show subdued reactions until 2015, after which the ECB increasingly interprets them as inflationary, whereas the Fed remains more cautious and output oriented. A one standard deviation physical risk shock raises the shadow rate by about 30 bps in the EA and 20 bps in the US after 20 months. These findings reveal that climate shocks have become an integral part of monetary transmission, shaped by mandates and macro-economic context, underscoring the need for price stability to enable the green transition.

Keywords: Climate Risks, Monetary Policy, ECB; Fed, Time-varying Local Projections, Price Stability. (search for similar items in EconPapers)
JEL-codes: E52 E58 Q54 Q56 (search for similar items in EconPapers)
Date: 2025-10-20
New Economics Papers: this item is included in nep-cba, nep-env, nep-eur and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:126542

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