Central Banking and Environmental Sustainability: How Monetary Policy Strategies Have Been Shaped Towards Green Objectives

Climate change and the political pressure for urgent policy responses have stirred an intense debate over whether central banks should adjust their monetary policy frameworks to support the green transition. Despite the seriousness of environmental issues and the seeming availability of monetary policy tools to address them, many argue that monetary authorities cannot be responsible for making policies that act upon the source of these issues. Among other reasons, the adoption of green monetary policy measures can conflict with the primary monetary policy goals, compromise the political independence of central banks, and raise questions about the legitimacy and increased power of some of these banks. Yet, evidence shows that a number of monetary authorities have already implemented specific measures and proposals that incorporate environmental criteria into their monetary policymaking, resulting in an expansion of monetary policy toolkits and areas of responsibility. In light of these developments, the central research question of this study is: Under what institutional conditions can the development of green monetary policy measures be best explained? To respond to this question, this study undertakes a comparative analysis of the legal mandates and environmental strategies of 20 central banks from the largest economies, between January 2010 and January 2024, followed by a detailed examination of three specific case studies: the Bank of Japan, the Swedish Riksbank, and the Federal Reserve System. The research findings contribute to the growing political science and political economy literature on the evolutionary process of central banks related to their support for environmental objectives.