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Is monetary policy transmission green?

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  • Benchora, Inessa
  • Leroy, Aurélien
  • Raffestin, Louis

Abstract

This paper examines whether traditional monetary policy affects firms differently based on their carbon emissions—a previously unexplored driver of monetary policy non-neutrality. We develop a theoretical model predicting that carbon-intensive (”brown”) firms are more sensitive to monetary policy shocks due to investor preferences for ”green” assets. We test this prediction using stock price data from U.S. firms between 2010 and 2019. Our findings confirm that brown firms are more sensitive to monetary policy shocks than green firms. This heightened sensitivity persists even after controlling for financial constraints and intensifies with rising climate awareness among investors. Our results suggest that traditional monetary policy is not carbon-neutral and unintentionally amplifies biases related to carbon emissions, highlighting important considerations for policymakers.

Suggested Citation

  • Benchora, Inessa & Leroy, Aurélien & Raffestin, Louis, 2025. "Is monetary policy transmission green?," Economic Modelling, Elsevier, vol. 144(C).
    • Handle: RePEc:eee:ecmode:v:144:y:2025:i:c:s0264999324003493
    DOI: 10.1016/j.econmod.2024.106992
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    More about this item

    Keywords

    Climate change; Carbon emissions; Stock returns; Monetary policy shocks; Risk premia;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • Q49 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Other
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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