Green Monetary Policy: What the Federal Reserve System Can Learn from the European Central Bank
Soomin Shin
Central banks like the European Central Bank (ECB) have started incorporating climate change considerations into their monetary policy tools. This Note refers to this phenomenon as green monetary policy (GMP). Given the crucial role of central banks and other monetary authorities in bank supervision and regulation, GMP has emerged as a solution to tackle the continued financing of fossil fuels and industries that have accelerated climate change. Among central banks, the ECB has emerged as a leader in GMP. However, the United States Federal Reserve Board (the Fed) has signaled a refusal to engage in any climate policymaking, including GMP. This paper argues that the Fed should follow the ECB by implementing GMP, given the central banks’ similar structure, general tools of monetary policy, and monetary policy-related goals. Although the Fed, unlike the ECB, does not have a secondary mandate to support general economic policies including environmental and climate-related goals, the Fed and the ECB are both mandated to promote price stability and act as a supervisor of financial risk. This Note analyzes the implications of the potential implementation of GMP by the Fed, comparing it to the ECB’s GMP, structure, and statutory mandates. It also explores key concerns and counterarguments in the literature against Fed implementation of GMP, which deal with independence, accountability, and mission creep. Despite these concerns, the Fed should continue to research climate change’s impact on macroeconomic stability and apply climate change considerations in its collateral policy, as the ECB has already done.