Central Banking in a Resource-Constrained World

Central banks find themselves today surrounded by crises. The cost-of-living crisis has once again brought into question the efficacy and appropriateness of traditional monetary policy to tackle inflation and the mainstream theories of inflation based on New Keynesian interpretations of the Phillips Curve (Tarullo, 2017; Ratner and Sim, 2021; Schnabel, 2022; Galbraith, 2023; Weber and Wasner, 2023).

Additionally, the climate crisis poses impact and transition risks to traditional core central bank responsibilities, such as financial sustainability through defaults and asset price deflation (Dafermos et al., 2018). However, only 12% of central banks have explicit sustainability mandates, and only 40% are mandated to support Government priority policies that include sustainability goals (Dikau and Volz, 2021).

Central banks have great potential to shape investment into economies, regulate the financial sector, support fiscal policies and financial stability, and drive the necessary sustainability transition of our economies (Boneva et al., 2022), but doing so risks stepping outside their current mandates (Siderius, 2023). The climate crisis and the need to support government policy have also brought into question the effectiveness and appropriateness of central bank independence given the requirement for close coordination between monetary and fiscal policies (Qanas and Sawyer, 2023).

Furthermore, independence can be questioned on the grounds that monetary policy may be working against the current attempts to drive the transition to a sustainable growth economy by hindering investment into renewables when hiking interest rates, causing economies to fall back onto the comparably low up-front costs of fossil fuels (Schnabel, 2023). A theoretically endogenous monetary ecological approach to economics, as opposed to empirically endogenous money found in the mainstream New Neoclassical Synthesis framework (Fontana, 2007), provides an interdisciplinary approach that can provide useful insights into these current crises of central banks by utilising ideas of bio-physical limits and the integration of the real and financial sectors of the economy.

Overall Aim:

- To investigate the nature and role of central banks in the climate transition, specifically the efficacy of monetary policy and central bank independence in tackling the climate crisis