Climate and Central Banks: The Green Shift Hangs on Politics and Public Expectations

When, in 2015, the then governor of the Bank of England, Mark Carney, sounded the alarm about the “tragedy of the horizon” caused by climate change, central banks began to take their first steps towards going green. But ten years on, central banks’ responses to climate risks remain highly divergent: while the ECB and the Bank of England have moved towards explicitly green measures, the US Federal Reserve has always resisted. “We are not policymakers on climate change,” Chairman Jerome Powell has repeatedly stated.

So what determines whether and to what extent a central bank engages in climate policy? The answer comes from a new study, “The Green Central Banking Pendulum,” by Donato Masciandaro (Bocconi) and Manuela Moschella (University of Bologna), which offers both an economic and political interpretation of the phenomenon: the green activism of central banks is the result of the dynamic interaction between political preferences, the sensibilities of central bankers, and the perceptions of citizens.

“Green central banking is not a neutral bureaucratic choice. It is a pendulum that swings according to the direction given by politicians and public opinion,” explains Masciandaro, full professor and holder of the Intesa Sanpaolo Chair in Economics of Financial Regulation.

The green triangle

The core idea of the paper is that central banks’ environmental activism is triggered only if three conditions exist:

1. A favorable political push, i.e., the desire of governments to display attention to climate issues by using the central bank as a tool for “political cueing.”
2. Environmental awareness on the part of the central banker, which may be linked to ideological convictions or the desire to build a reputation.
3. An attentive civil society, capable of perceiving and evaluating the actions (or omissions) of the central bank.

In this scheme, the central bank acts as an agent in a multi-level delegation relationship, where it must balance its formal autonomy with the expectations of politicians and the reactions of citizens.

“Our model shows that the legal independence of the central bank matters less than is commonly believed: what really matters is how legitimate the public considers the central bank’s intervention on climate change to be,” Masciandaro points out.

The numbers behind activism

The study sets up a theoretical model that integrates monetary policy, financial supervision, and climate sensitivity, quantifying the effect of green activism in terms of inflation and growth. At the heart of the model is a formula:

𝜒_ga = μΩ_pθ_cb,

where:

• μ measures how much citizens value politicians’ green preferences;
• Ω_p represents the intensity of green political attitudes;
• θ_cb is the central banker’s sensitivity to environmental issues.

The result is that, even with the same climate shock, macroeconomic outcomes can be very different depending on the interaction between these three factors. For example, a “green neutral” central banker in a hostile political environment with unattentive citizens will produce minimal macro effects, while a sensitive banker supported by politics and public opinion can have a significant impact on leverage, inflation, and growth. “Central banks only become green actors when they perceive that doing so is also beneficial in terms of reputation or consensus: it is not a technical automatism, but a political balance,” Masciandaro adds.

The stakes: climate inflation

The study also introduces the concepts of “climateflation” (inflation caused by climate shocks) and “greenflation” (inflation caused by ecological transition), emphasizing that central banks cannot ignore these effects in the medium term. However, the response to these phenomena may be more or less effective depending on the combination of political pressure and public attention.

Among the cases cited in the paper:

• the ECB, which has integrated climate risk into its securities purchase operations (“green QE”);
• the use of macroprudential instruments to direct credit towards sectors with low environmental impact;
• the differences in approach between “conservative” and “populist” central banks towards multiple objectives (inflation, growth, financial stability, climate).

An open challenge

The paper does not merely describe the present, but suggests topics for future research: identifying specific events that trigger the “green leap” (appointments, pressure from civil society, external collaborations) and better studying the actual preferences of politicians and citizens on the green role of central banks. Ultimately, climate activism by central banks is far from a foregone conclusion. As the authors write in their conclusions: “Green central banking is not a starting point, but an endogenous variable. It is an unstable and political equilibrium that depends on how the pendulum of expectations swings.”