Central Banking: Theory And Practice In Sustain... Now

The traditional mandate of a central bank—maintaining price stability and, in some cases, supporting full employment—is undergoing its most significant evolution since the shift to inflation targeting in the 1990s. As the global economy faces the systemic threats of climate change and environmental degradation, the theory and practice of central banking are being redefined to incorporate . 1. The Theoretical Shift: From "Neutrality" to "Prudence"

Historically, central banking theory was built on the principle of . The idea was that central banks should not pick "winners and losers" when conducting open-market operations or setting collateral frameworks. Central Banking: Theory and Practice in Sustain...

Some central banks, such as the European Central Bank (ECB), have begun "tilting" their asset purchases. This involves favoring corporate bonds from companies with better environmental footprints and imposing "haircuts" (reduced valuations) on carbon-intensive assets used as collateral by commercial banks. This involves favoring corporate bonds from companies with

However, the emergence of has challenged this stance. Economists now argue that ignoring carbon intensity is not being neutral; it is a failure to account for risk. Theory has expanded to include two primary categories of risk: have begun "tilting" their asset purchases.

The risk that sudden policy shifts or technological breakthroughs will lead to "stranded assets"—investments in fossil fuels that lose value overnight. 2. Practice: Greening the Monetary Policy Toolkit

The Bank of Japan and the People’s Bank of China have implemented specialized lending facilities that provide low-interest loans to commercial banks, specifically for onward lending to green projects.

In practice, "Green Central Banking" manifests through several operational changes: