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Climate Change, Financial Stability and Monetary Policy

Dafermos, Yannis; Nikolaidi, Maria; Galanis, Giorgos


Maria Nikolaidi

Giorgos Galanis


© 2018 The Authors 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 quantitative easing (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 2016–2120. 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, climate-induced financial instability might adversely affect credit expansion, exacerbating the negative impact of climate change on economic activity. Fourth, the implementation of a green corporate 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.


Dafermos, Y., Nikolaidi, M., & Galanis, G. (2018). Climate Change, Financial Stability and Monetary Policy. Ecological Economics, 152, 219-234.

Journal Article Type Article
Acceptance Date May 16, 2018
Online Publication Date Jun 20, 2018
Publication Date Oct 1, 2018
Journal Ecological Economics
Print ISSN 0921-8009
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 152
Pages 219-234
Keywords ecological macroeconomics, stock-flow consistent modelling, climate change, financial stability, green quantitative easing
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