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Toward a green economy: the role of central bank's asset purchases

A. Ferrari,Valerio Nispi Landi

Published 2022 in Social Science Research Network

ABSTRACT

The European Union aims to be climate - neutral by 2050, consistent with the commitment to keeping the increase in global average temperature to well below 2°C above pre - industrial levels. While elected governments are primarily responsible for meeting this goal, central banks may also play a role. One option on the table is to design a programme of green asset purchases, the so - called Green QE. We set up a model to study the potential effectiveness of Green QE alongside a transition to an economy with zero carbon emissions driven by a carbon tax. The carbon tax gradually increases over time and leads to progressive pollution abatement by firms. We find that the Green QE is more effective when the carbon tax is absent or low and so the timing of the purchases is crucial for the effectiveness of Green QE. As in the long run emissions go to zero anyway as a result of the carbon tax, so the programme is more useful to reduce emissions in the short/medium run, in order to get a larger effect on the pollution stock. For this reason, a temporary but more aggressive program where purchases are concentrated in the short run and then the portfolio is slowly run down is more effective than a gradual and long - lasting one of a similar size. While in our model the overall impact of this policy is somewhat limited, it does not capture other channels that can play an important role (e.g. signalling effect and R&D investments).

PUBLICATION RECORD

  • Publication year

    2022

  • Venue

    Social Science Research Network

  • Publication date

    Unknown publication date

  • Fields of study

    Not labeled

  • Identifiers
    DOI 10.2139/ssrn.4032790
  • External record

    Open on Semantic Scholar

  • Source metadata

    Semantic Scholar

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