ABSTRACT
One of the key elements in combating climate change is large private or public capital expenditure in green technologies. However, governments are constrained in financing such large expenditures whether through raising taxes or by borrowing. In such cases, independent central banks, may be more suitable to address this urgent issue. Some studies have discussed green quantitative easing (QE) as a strategy available to central banks to address climate change. Alternative perspectives have also argued that this may conflict with market neutrality and could lead to the emergence of financial bubbles. Emerging economies, characterised by pronounced financial frictions, are likely to face a more intricate manifestation of this issue. Employing a dynamic stochastic general equilibrium (DSGE) framework incorporating financial friction and a dual-sector production setup (comprising green and dirty sectors), the objective of this chapter is to model and evaluate the effects of green QE in an emerging economy. The model is characterised by a substantial proportion of Non-Ricardian economic agents and a higher degree of asset market segmentation. The aim of this chapter is to provide a theoretical framework that enables central banks in emerging economies to contribute to climate change mitigation while keeping in mind unique trade-offs between potential climate-related losses, inflation volatility, and financial stability.
