Whatever it Takes to Save the Planet? Central Banks and Unconventional Green Policy

Abstract

We study the effects of a temporary Green QE, defined as a policy that temporarily tilts the central bank’s balance sheet toward green bonds, i.e. bonds issued by firms in non-polluting sectors. To this purpose, we merge a standard DSGE framework with an environmental model. In our model, detrimental emissions produced by the brown sector increase the stock of pollution. We find that the imperfect substitutability between green and brown bonds is a necessary condition for the effectiveness of Green QE. Under the assumption of imperfect substitutability, we point out the following results. A temporary Green QE is an effective tool in mitigating detrimental emissions. However, Green QE has limited effects in reducing the stock of pollution, if pollutants are slow-moving variables such as atmospheric carbon. The welfare gains of Green QE are positive but small. Welfare gains increase if the flow of emissions negatively affects also the utility of households.