Role Of Monetary Policy In The Transition To A Low-Carbon Economy

Abstract

This study probes into the impact of monetary policy on climate change in Pakistan. Carbon emissions has been used a proxy for climate change. Two monetary policy transmission channels, termed as interest rate channel and credit channel, have been selected for the study. Time series data from 1990 to 2020 for Pakistan has been used and FMOLS and GMM estimation techniques have been employed in the study. The empirical findings of the research study confirm that monetary policy positively impacts climate change (higher carbon dioxide emissions) through both the interest rate channel and the credit channel. On grounds ofthe empirical findings, the study proposes a proactive role of central banks to make the shift from a high-carbon to a low-carbon economy through monetary policy. Hence, the study recommends directing monetary policy such that low and discounted interest rates are offered for environment friendly projects and higher credit and lending is allocated for green sectors and sustainable investments.