Central Banks and Climate Policy : Unpleasant Trade–Offs?A Principal–Agent Approach

This paper focuses on the trade–offs that central banks would face if they were to start tackling climate change. Disruptive natural events can hamper capital accumulation and growth, thereby affecting financial stability for which central banks are responsible. Yet, the array of instruments they could use to mitigate climate–related risks overlap with those already used in relation to their monetary and macroprudential mandates. By leveraging on a principal–agent setting, we consider the conditions under which the central bank architecture would be fit to take on this objective without jeopardising the attainment of central banks’ core mandates. We also model in a general framework the corresponding effects in terms of climate risks. Our results show that central banks’ effectiveness with these regards crucially depends on their calibration capacity, independence and degree of interventionism