How Effective is Monetary Policy for Macroeconomic Stabilisation when Environmental Sustainability is a Central Bank Objective?

How Effective is Monetary Policy for Macroeconomic Stabilisation when Environmental Sustainability is a Central Bank Objective?

Economics

Soham Warikoo

2025

Monisha Pandhi

This paper examines how central banks integrating sustainability initiatives into monetary policy affects macroeconomic stability. Using quarterly data for 184 countries from 2001 to 2024, we assess whether membership in the Network for Greening the Financial System (NGFS), as a proxy to show whether a central bank is sustainable, influences five macroeconomic variables: inflation, inflation volatility, GDP growth, GDP volatility, and unemployment. A series of pooled OLS and fixed effects regressions are used, while semi-structured interviews with central bank officials complement the quantitative analysis. The results indicate that NGFS membership is generally associated with greater macroeconomic stability in high-income economies, reflected in lower inflation, stronger growth, and reduced volatility. Interviewees from high- and middle-income countries agreed that their central banks did not recognise a trade-off between sustainability in central banking, and the effectiveness of monetary policy. However, regression results indicate that middle- and low-income countries experience trade-offs, possibly due to weaker institutional capacity and resource constraints.

Economics, Monetary Policy, Green Monetary Policy, Macroeconomics, Economic Policy, Central Banking, Central Banks, Sustainability, Environment