Climate Change, Financial Stability and Monetary Policy

Dafermos, Yannis; Nikolaidi, Maria and Galanis, Giorgos. 2018. Climate Change, Financial Stability and Monetary Policy. Ecological Economics, 152, pp. 219-234. ISSN 0921-8009 [Article]

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Abstract or Description

Using a stock-flow-fund ecological macroeconomic model, we analyse (i) the effects of climate change on financial stability and (ii) the financial and global warming implications of a green QE programme. Emphasis is placed on the impact of climate change damages on the price of financial assets and the financial position of firms and banks. The model is estimated and calibrated using global data and simulations are conducted for the period 2015-2115. Four key results arise. First, by destroying the capital of firms and reducing their profitability, climate change is likely to gradually deteriorate the liquidity of firms, leading to a higher rate of default that could harm both the financial and the non-financial corporate sector. Second, climate change damages can lead to a portfolio reallocation that can cause a gradual decline in the price of corporate bonds. Third, financial instability might adversely affect credit expansion and the investment in green capital, with adverse feedback effects on climate change. Fourth, the implementation of a green QE programme can reduce climate-induced financial instability and restrict global warming. The effectiveness of this programme depends positively on the responsiveness of green investment to changes in bond yields.

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Supplementary material to this article can be found online at

An earlier version of the paper was presented at the 20th Conference of the Research Network
Macroeconomics and Macroeconomic Policies (FMM), Berlin, October 2016, the European Association for
Evolutionary Political Economy Conference, Manchester, November 2016, the Bank of England workshop ‘Central
Banking, Climate Change and Environmental Sustainability’, London, November 2016, the 12th Conference of the
European Society for Ecological Economics, Budapest, June 2017 and the EcoMod2017 Conference, Ljubljana, July

This paper has also been published in Greenwich Papers in Political Economy, University of Greenwich, #GPERC54 and Post Keynesian Economics Study Group, Working Paper 1712


Climate change, Financial stability, Green QE programme

Departments, Centres and Research Units:

Institute of Management Studies


16 May 2018Accepted
20 June 2018Published Online
October 2018Published

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Date Deposited:

04 Jun 2018 15:12

Last Modified:

13 Jun 2021 12:26

Peer Reviewed:

Yes, this version has been peer-reviewed.


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