Use ECB’s money-creation capacity to support environmental projects

23 Mar, 2019 at 12:25 | Posted in Economics | 4 Comments

There is no limit to the amount of financial assets the ECB can buy. In principle, it could purchase all existing financial assets (all bonds and shares, for example) … There is also no restriction on what types of assets the ECB can buy … It could replace the old bonds with new ‘environmental bonds’, issued to finance environmental projects.

ja16greenbondsThe bottom line is that it is perfectly possible for the ECB to use the instrument of money creation to favour environmental investments without endangering price stability …

Given the existential threat of the degradation of the environment, including climate change, the priority should be to use the ECB’s money-creation capacity towards the support of environmental projects. This can be done without creating inflation.

Paul De Grauwe

So now we are eagerly awaiting the Krugman-Summers-Rogoffs denouncing this proposal as “dangerously wrong.” In the scientific world,​ it doesn’t matter who says​ what. So, if MMTers propose central banks to buy ‘green bonds’ that must be evaluated the same way as when a renowned mainstream professor at the LSE’s European Institute says so. Or …?

4 Comments

  1. “The bottom line is that it is perfectly possible for the ECB to use the instrument of money creation to favour environmental investments without endangering price stability …”

    Not when the economy is at or near capacity.

    As to whether the EU economy is near capacity, it is important not to be taken in by the obvious point that Greece and some other periphery countries are nowhere near capacity. The co-existence of Germany being near capacity, with Greece obviouisly being nowhere near capacity is a problem specific to a common currency area, and thus cannot be used as an argument against my above point.

  2. The idea is not new. The Hamburg-based World Future Council (WFC) proposed that central banks of developed countries continue ‘quantitative easing’ (QE), but not to buy existing financial assets. Instead, they should invest in ‘Green Climate Bonds’ (GCBs) issued by multilateral development banks, the GCF or some other designated climate finance institution to fund renewable energy projects in developing countries.
    Readers may want to read my opinion piece, “Much more climate finance now!” (with Jomo, KS), 12 Sept. 2017, http://www.ipsnews.net/2017/09/much-climate-finance-now/

  3. The big problem is that none of the variations in the computed emissions, not even the big dip in connection with the crash 2007/8 has made any impression on the growth of concentration of CO2 in the atmosphere. Witch means there is no proof that the declared emissions are anything more than declarations. And reforms like green bonds and other green capitalism reforms even less.https://www.esrl.noaa.gov/gmd/ccgg/trends/gl_full.html

  4. de Grauwe’s idea is good, but tightly constrained by the amount of maturing bonds. ECB has only created reserve money (not broad money) in exchange for corporate bonds from banks, and its possible future creation of new money (by buying green bonds from a non-bank institution – EIB) would only offset the maturing bonds. However, other world-wide initiatives to purchase green bonds (like the above suggestion) would – different from the euro area – actually add liquidity.


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