Maybe It’s Not Time to Blend Monetary Policy with Climate Policy

The Network of Central Banks and Supervisors for Greening the Financial System, a grouping of central banks and financial regulators that aims to help manage climate risk to the financial system and, according to its website, “mobilize mainstream finance to support the transition toward a sustainable economy,” had just eight members when it was formed in 2017. Today it boasts more than 160 members and observers, ranging from large global players such as the European Central Bank, the People’s Bank of China, and the Bank of Japan to relative minnows such as the central banks of Serbia and Seychelles.

One notable absence is the US Federal Reserve, which left the NGFS this past January.

While few economists would dispute that climate change is a major global issue and one that will have major economic implications over the coming decades, its relevance to monetary policy—at least in the short run—is far less clear.

The NGFS argues that “climate change is not a distant threat—it is a current reality reshaping our economies and financial systems. Understanding the immediate impact of climate-related risks has thus become an urgent necessity for central banks and other financial actors.”

Many finance experts are not sold on the connection between climate change and central banking, however. In May, Chicago Booth’s Kent A. Clark Center for Global Markets polled its panel of finance scholars about the near-term relevance of climate change’s physical risks to monetary policy and financial stability. On the whole, the panel was unconvinced that climate risk will be a major concern of central banks in the immediate future.

The panel was first asked whether “under current policies on climate change, the associated physical risks (such as those arising from total seasonal rainfall and sea level changes, and increased frequency, severity, and correlation of extreme weather events) will be at most a very small factor in monetary policy decisions over the next decade.” Weighted by confidence, 52 percent of respondents either strongly agreed or agreed, while 33 percent were uncertain. Just 15 percent of respondents disagreed.