Central banks and climate change (Part 2). Can central banks intervene now? And how? Arguments of 'opportunity" and 'suitability" Articles uri icon

publication date

  • May 2023

start page

  • 260

end page

  • 320


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  • Climate change is humanity¿s defining challenge for the XXIst century, and central banks have for a long time been absent from the picture. No longer. Having showed that climate change considerations fit within central banks¿ mandates (Part 1), Part 2 analyzes why central banks can, and should act now (opportunity), and how (suitability). Central banks should act now not just because the cost of waiting is too high, but also because complex models show that climate-related shocks would propagate through a networked financial system, rendering central banks powerless to act. In fact, careful consideration of the argument of opportunity makes it pertinent to ask why central banks did not act earlier. We offer two explanations; one based on the role of uncertainty, and ambiguity aversion (and how it hinders our ability to act rationally), and another on the role of (slowly-changing) social norms. Then, we consider how the arguments for and against a proactive approach could play before the courts, in case central banks actions are challenged (one way or another). Then, we show that the debate on "suitability" is full of misunderstandings. Objections that central banks are "unsuitable" tend to ignore that central banks do not have "one tool", but a vast arsenal of tools (some unsuitable, some not) and that the risks of endangering "market neutrality" or "independence" should be analyzed in case of action, and inaction. Upon closer consideration, central banks are not asked to exercise new competences or skills, or to upend their mindset, but to deploy some of their tools in a precise and time-consistent manner (i.e., playing to their strengths). There are obstacles, of course; only less obvious ones. Central banks are uncomfortable mixing "assertion" and "persuasion"; negative, "brown" approaches may be more effective, but more conflictual. Living with conflict, and trial-and-error may be a given to execute their mandate well in this new setting, but it is a challenge nonetheless.
    To overcome it, we need a renewed commitment to central bank independence, but also a gradual change in central bank practices to foster dialogue with democratically elected bodies. This two-pronged approach will place central banks in an adequate role for the XXIst Century, and bolster their legitimacy, and courts should act as gatekeepers.


  • Economics
  • Law