Carrots with(out) sticks: credit policy and the limits of green central banking

Abstract

This article considers the role of central bank interventions in credit and financial markets in support of decarbonization. Drawing on the critical macrofinance literature, we argue that central banks are constrained in greening financial flows by their continued adherence to monetary dominance – prioritizing short-term price stability – and the structural demands of global market-based finance. This has led to a narrow focus on 'market-fixing' and 'de-risking' policy interventions, implicitly outsourcing the green transition to private finance whilst asserting that central banks cannot be seen as 'climate policymakers'. Moving beyond the constraints of this macrofinancial regime remains challenging, as we illustrate with the European Central Bank's (ECB) tilting of its corporate asset purchase program. We explore the lessons from the Post-World War II credit guidance regimes employed in many countries and consider how these could be updated to meet the challenges posed by market-based finance. Such a shift would require an evolution in the role of the central bank as a public agency, challenging current norms around independence and market neutrality.