Updates from Chicago Booth

Don’t rely on central banks to fight climate change
By Jeff Cockrell – In late August, five members of the US House of Representatives issued a statement urging President Joe Biden not to reappoint Jerome Powell, the chairman of the Federal Reserve, when his term expires in February 2022. The group, which included Alexandria Ocasio-Cortez (Democrat of New York), cited two concerns with Powell’s leadership: the Fed’s relaxation of banking regulations and its lack of action “to mitigate the risk climate change poses to our financial system.”

Ocasio-Cortez and her fellow members of Congress are not the first to suggest that central banks—whose policies have traditionally focused on objectives such as price stability and low unemployment—have a role to play in fighting climate change. The British Parliament’s Environmental Audit Committee (EAC) has encouraged the Bank of England to conduct its bond purchases with borrowers’ carbon emissions in mind. Many central banks themselves have also accepted some responsibility for fighting climate change: the European Central Bank says it is “committed to taking the impact of climate change into consideration in our monetary policy framework.”

But Chicago Booth’s Lars Peter Hansen cautions that monetary policy is a weak substitute for fiscal policy, which is far better suited to address climate change through tools such as carbon taxation and investment in green technologies. Asking central bankers to step in where fiscal policy makers can’t or won’t risks exposing central banks to reputational damage and a loss of political independence, he argues. more>

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