The cautious march of central banks toward climate policy measures

This study examines central banks' cautious yet evolving approach toward integrating climate-related policy measures within their mandates. An extensive literature search finds that unconventional monetary and collateral-based policies have the possibility of violating the market neutrality rules and may face political resistance. Regarding carbon tax, central banks can play a supportive rather than a pivotal role, and stress-testing, which can be an effective tool to disclose climate risk, is still nascent. Furthermore, a binomial logistic regression model has been employed using three key indicators: green bond issuance, carbon intensity of GDP, and the green macroprudential index, along with GDP and climate vulnerability as control variables across 55 countries. Results show that although central banks are the dominant climate risk regulators in most countries studied, their involvement does not significantly predict superior green financial outcomes. Notably, a negative association is observed between regulatory stringency and central bank enforcement, suggesting that non-central bank institutions may administer mature green regulations. The jackknife method indicates that central banks can be an efficient facilitator of green bond issuance when the data of the United States, the key opponent of green central banking, is excluded from the model. The study recommends a clearly defined mandate for central banks and advocates for coordinated monetary-fiscal strategies to ensure effective and balanced climate action.