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Patozi, A.

Green Transmission: Monetary Policy in the Age of ESG

JIWP Number: 2302

Abstract: In this paper, I investigate how the Net-Zero transition affects the transmission of monetary policy. I first document an upward trend in environmental performance among US publicly listed companies over the last decade. Second, I evaluate the implications of firms becoming ‘greener’ for the transmission of monetary policy on asset prices, credit risk and firm-level investment. In response to a shock to monetary policy, ‘green’ firms (with high environmental scores) are significantly less impacted than their ‘brown’ counterparts (with lower environmental scores). The dependence of monetary policy responses on firm-level greenness is not explained by intrinsic differences in firms’ characteristics. Instead, I show that the heterogeneous response is the result of investors’ preferences for sustainable investing. Using a stylized theoretical framework, I illustrate how incorporating such preferences attenuates the semi-elasticity of ‘green’ asset prices with respect to monetary policy shocks.

Keywords: Climate Change, ESG, Heterogeneity, Monetary Policy, Sustainable Investing

JEL Codes: E52 G12 G14 G30

Author links: Alba Patozi  

PDF: jiwp2302.pdf

Open Access Link: 10.17863/CAM.93380

Theme: transmission