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Central bank green policy, emissions reduction, and financial stability

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  • Wang, Jun-Zhuo
  • Herwartz, Helmut

Abstract

This paper investigates the dual effects of central bank green policy (CBGP) on greenhouse gas (GHG) emissions and financial stability by constructing a novel global index of CBGP. We estimate random-effects GLS models on first-differenced panel data for 127 countries over 2003–2022 to capture the short-run effects of policy changes. CBGP adoption is associated with weakly significant reductions in per capita CO₂ and GHG emissions, with no robust evidence of average effects on bank non-performing loans (NPLs) or profitability, though the estimates suggest short-term adjustment pressures. Emissions reductions are primarily driven by green monetary policy, which are also linked to higher bank NPLs and weakly significant declines in bank profitability, while regulatory measures show more limited effects. Overall, these findings highlight the potential policy trade-off central banks face between advancing climate change mitigation and safeguarding financial stability.

Suggested Citation

  • Wang, Jun-Zhuo & Herwartz, Helmut, 2026. "Central bank green policy, emissions reduction, and financial stability," Energy Economics, Elsevier, vol. 158(C).
    • Handle: RePEc:eee:eneeco:v:158:y:2026:i:c:s0140988326002574
    DOI: 10.1016/j.eneco.2026.109378
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    Keywords

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    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G01 - Financial Economics - - General - - - Financial Crises
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General

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