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Central banks have a key role in greening the economy

Wednesday, May 12, 2021

Significance

It will not be easy to reconcile new tasks with traditional price-stability mandates. Moreover, it is not clear what data banks should use to measure progress, while a green transition will depend on closer coordination with governments, creating challenges for politically independent central banks.

Impacts

  • As governments raise carbon taxes, there will be calls to loosen monetary policy to offset their deflationary effect.
  • ‘Mission creep’ is a risk for authorities; financial firms may incur losses if politicians fail to follow through on carbon price moves.
  • Green investments risk a bubble effect, especially as short-run supplies of metals such as cobalt and lithium are limited.

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