Bank Lending Policies and Green Transition

We consider a green monetary policy framework implemented by the central bank. Under this framework, firms and commercial banks decide whether or not to apply a green (environmentally friendly) or brown (conventional) investment and policy, respectively. We develop an evolutionary game to study the conditions under which a stable or unstable equilibrium is reached. If the green firms' revenues minus their bank loans and their transition costs are strictly greater than the brown firms' revenues and their pollution costs, together with (primary or subsidized) green interest rates such that the default risk is lower for green firms compared to brown ones, then the economy evolves to a asymptotically stable green state. In the green state all banks give green loans and all firms invest in green investment. If the condition is reversed the economy converges to a brown state. If the banks and the firms are indifferent towards the green and brown policy and investment respectively, the economy fluctuates from green to brown state. There may be multiple equilibria. Through a transcritical bifurcation we show how stability (instability) of the equilibria changes with the parameters.