The Green Central Banking Pendulum:  Political Cueing, Central Banker Sensibility, and Citizen Beliefs

This article uses a political economy approach to offer a positive analysis of the green activism of a special bureaucracy—an independent central bank—that designs its own monetary and supervisory policies. Three drivers explain the evolution of the central bank’s green activism: the green political attitude, which reflects how the incumbent politicians would like to involve the central bank in climate-change policies and considers such involvement as political cueing; the green sensibility of the central bankers involved in such policies; and the attention citizens pay to these issues though their beliefs. Given the preferences of the incumbent politicians and bureaucrats, and their relevance for the citizens, green activism can be interpreted in either a hostile or cooperative way depending on the extent to which the different preferences are homogeneous. With homogeneous preferences, the political wishes strengthen the central bank’s aims. With disparate preferences, the politicians bend the central bank to their agenda. The de facto “stretching” of the given de jure central-bank mandate and the corresponding macroeconomic effects are endogenous results, the importance of which depends on citizens’ beliefs. JEL classification: D02, E52, E58, E61