The paper studies the transmission mechanism of a central bank's purchase programme of green bonds, i.e. bonds issued by firms that do not pollute. We assess the impact of this policy on macroeconomic and environmental variables. We use a dynamic general-equilibrium model in which CO2 emissions increase when the production of polluting ('brown') firms rises, adding to the stock of atmospheric carbon.
Tilting the central bank's portfolio toward green bonds reduces the return on these assets only if there are frictions preventing the private sector from exploiting the resulting arbitrage opportunities. In this case, the purchase programme increases the financing cost of brown firms, temporarily reducing brown production and emissions. However, without other policies facilitating the ecological transition, the effects on the stock of atmospheric carbon are very limited.
Forthcoming in: Macroeconomic Dynamics
