Crafting monetary policy beyond low carbon legacy

Are monetary policy and financial development important prerequisities for realising a low carbon economy? The answer is yes, but this work argues that its importance rests on different associated mechanisms. We test this assertion by using a panel of 24 OECD countries, spanning the period 2000–2019. The analysis is framed in four empirical strategies. The first method involves employing standard panel specifications, which control for unobserved error term components. The second examines the long- and short-term dynamics of the relationships using Generalized Method of Moment (GMM) dynamic specifications. The third employs the Machado and Silva Quantile via Moment approach to reassess the drivers of carbon neutrality heterogeneity. Additionally, alternative and supplementary approaches based on statistical procedures, such as Hausman-Taylor and Feasible Generalized Least Squares, are carried out to test the robustness of the findings. The analysis indicates that lagged carbon emissions have a significant and positive impact on subsequent carbon emissions. The findings also suggest that both monetary policy and financial development are critical in mitigating carbon emissions. Conversely, an upsurge in the share price index is linked to an increase in carbon emissions. These findings underscore the significance of integrating monetary and financial development into a comprehensive strategy that considers both current and past carbon emissions to attain sustainable environmental outcomes.