Monetary Policy at the Crossroads – How to Respond to the Climate Crisis

Monetary and financial stability constitutes one of several building blocks for a Sustainable Social Market Economy. Climate change, however, threatens both price and financial stability. This poses substantial challenges for central banks worldwide.

To effectively address these challenges, central banks must adapt their monetary policies and macroprudential tools. Failing to do so could hinder their ability to achieve their core objectives, which include maintaining price stability and often promoting sustainable economic growth.

This focus paper offers specific suggestions as to what these adaptations might look like. First, it proposes the introduction of targeted green refinancing lines. Second, it argues for an adjustment of central banks’ eligible collateral frameworks. Third, the authors propose excluding bonds issued by carbon intensive companies that lack credible green transition strategies from bond purchase programs.