Central Banking and Sustainable Development

Abstract

Can we consider any role for central banks in sustainable development? From mainstream economics perspective, monetary policy should be neutral, and the central banks have no role to play beyond inflation targeting. In contrast, the present study argues that environmental risks and climate changes entail significant costs for the banking system and deteriorate financial stability. Central banks to fulfill their mandate and safeguard financial stability inevitably react to environmental risks. Furthermore, they have efficient instruments at their disposal, relying on they are able to internalize externalities; the instruments which fiscal policy authorities are in lack of. From this perspective, central banks have to consider environmental risks and developmental issues when designing credit policies and setting micro and macro-prudential regulations, even if they are going to commit to their traditional mandates. They need to be mandated to motivate banks to extend credit for environment-friendly projects and increase the cost of finance for brown investments. This is the essence of developmental role that central banks are adopting increasingly, especially in developing countries.