Financial Policy, Green Transition and Recovery after the COVID-19

Abstract

Public policy that acts on financing activity -- referred to here as “financial policy” -- can play an important role in supporting the green transition and recovery of the economy. This research studies the specific role of financial policy, the mechanism of support, and how financial policy can be coordinated with other public policies that encourage the green transition, particularly in the recovery period after the COVID-19 pandemic. The method we employ is a macroeconomic growth model with “directed technical change”, the natural environment, and financial features. It is found that (1) financial constraints are non-trivial in the economy and could delay the green transition if no additional policy is introduced. (2) Financial policy directionally supporting the green economic sector can facilitate the green transition and help stop the environmental degradation. (3) A financial policy can bring effects similar to some other policies in supporting the green transition. Compared with related policies, financial policy has certain advantages and disadvantages. There is a clear theoretical rationale to combine financial policy with other policies to save cost and improve the effect. (4) A green recovery after the COVID-19 shock can be realised with an appropriate mix of financial policy and other related policies. The post-pandemic period offers a window of opportunity to hasten the green transition. These findings not only justify the desirability of the currently popular “green financial policy”, show the way of policy conduction and coordination, but also reveal the special value of such policy after the COVID-19 if we want to accelerate the “green recovery”.