Sustainability and central bank independence
Warwick Business School
wbs.ac.uk
Climate change is an existential threat to the human race that has risen high up the political and social agenda. We are all directly affected, and we are all partly responsible.
No central bank is the lead authority on making its economy sustainable – that responsibility lies properly and everywhere with governments who have control over the necessary legislation and fiscal policy to address the issues. But to meet their existing statutory objectives, central banks need to take account of any potential shocks to the macroeconomy in general and the financial system in particular. Climate shocks threaten the economy and hence monetary policy must take them into account. Climate shocks also pose risks to the banking system and hence financial regulation and policy must respond to try and make the system resilient.
Similar issues arise with other sustainability issues such as biodiversity and natural capital loss. Nevertheless, the involvement of central banks in sustainability issues has raised questions of over-reach – especially in countries where these are politically sensitive topics. Central bank independence is a double-edged sword: Being independent does not mean that one’s actions are unconstrained. Central banks will be keen to be seen to strike a balance between addressing these major risks within their mandates, whilst not taking on responsibilities which they have not been formally given.
Climate shocks threaten the economy and hence monetary policy must take them into account.”
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