How unconventional is green monetary policy?

Webinar on Zoom

Abstract: This paper studies the environmental impact of unconventional monetary policy. Our theoretical framework is a multisector growth model with climate externalities and financial frictions. When central bank asset purchases have real effects on aggregate output, their sectoral composition typically affects the climate. Market neutrality of asset purchases does not follow from simple formulas used by policy makers, but depends on (i) the impact of central bank purchases on firms’ cost of capital and (ii) the share of capital funded by bonds. We use micro data on individual bond holdings, firm characteristics and emissions to show that the ECB’s corporate bond portfolio is tilted towards high emission sectors compared to the market portfolio of sectoral capital stocks.

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