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Emission-based Interest Rates and the Transition to a Low-carbon Economy

Author

Listed:
  • Florian Böser

    () (Center of Economic Research (CER-ETH), ETH Zurich, Switzerland)

  • Chiara Colesanti Senni

    () (Center of Economic Research (CER-ETH), ETH Zurich, Switzerland)

Abstract

We use a dynamic general equilibrium model to study a climate-oriented monetary policy in the form of emission-based interest rates set by the central bank. Liquidity costs of banks increase with the emission intensity of their asset portfolio, leading banks to favor low-carbon assets and to improve the financing conditions for clean sectors. We show that such a monetary policy supports the decarbonization of the economy and reduces climate damage, as more resources are channeled to low-carbon sectors and incentives to adopt cleaner technologies increase across all sectors. We illustrate these effects by calibrating our model to data for the Euro Area.

Suggested Citation

  • Florian Böser & Chiara Colesanti Senni, 2020. "Emission-based Interest Rates and the Transition to a Low-carbon Economy," CER-ETH Economics working paper series 20/337, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
  • Handle: RePEc:eth:wpswif:20-337
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    More about this item

    Keywords

    climate change; monetary policy; banks; innovation; financial stability;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • O44 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Environment and Growth

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