Central Banks Need to Take Action to Fight Climate Change

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Hubert Kempf, Professor of Economics at the Ecole Normale Supérieure Paris - Saclay (France) and Academic Supervisor of HSE International Laboratory for Macroeconomic Analysis (IMLA), will speak about the greening of monetary policy at a meeting of the Discussion Club on Modern Economic Policy on November 25. In his interview, Professor Kempf spoke about the work of IMLA, the development of macroeconomics, and the role central banks can play in combatting climate change.

Professor Kempf has held positions as Senior Fellow of the Institut Universitaire de France and Paris School of Economics. He has worked at the Banque de France and regularly visits central banks. He is also a former president of the French Economic Association. 

Professor’s Kempf research focuses on monetary unions and integration issues, as well as the greening of finance and banking. He has published extensively in various research journals and recently released a book entitled L'économie des unions monétaires An updated version in English is to be published by Springer Verlag in 2021.

Hubert Kempf

IMLA in the Global Context

At IMLA, we have a commitment to have a regular event hosted by HSE University to be able to bring in international scholars involved in macroeconomics to exchange ideas and interact with the local macro researchers, both senior and junior. A recent event, which we organized with Olga Kuznetsova, was an online workshop on October 15.

This year we had six non-Russian speakers plus one Russian speaker and all the discussants were Russian—members of IMLA.  Afterwards, one of the presenters wrote to me that he had been very astonished by the quality of the comments that he received from his discussant. Actually, that was true for all discussants.

This proves that this lab is upgrading and coming up the ladder of international research

The discussants were clearly aware of the literature and were able to discuss papers at the frontier of macroeconomics. That is an improvement compared to four or five years ago, so the long-lasting collective effort bears fruit. But we need to be patient and must be aware of the difficulty involved in setting up a working research centre at an international level, especially considering the intensity of international competition in economics and macroeconomics, in particular. There are constant advances in research and the methods are becoming more and more complex now. But I think that we're on the right path.

Development of Macroeconomics

There are two domains to be scrutinized—the topics and the methods. The methods in macroeconomics have been developing and changing quite a lot because the tools available to macroeconomists are always constantly changing.

I think that we are again on the verge of a new revolution in macroeconomics, the third one. The first revolution was in the 1950s and 60s when the Keynesian revolution set up macroeconomics as a distinct discipline within economics. The second revolution, in 1970s-80s, allowed researchers to deal with very sophisticated models thanks to the widespread use of personal computers. At the same time, the introduction of a proper way to model expectations has been a real breakthrough because macroeconomics deals with the dynamics of the economy, requiring an adequate treatment of expectations.

The third revolution that is about to come will be due to the massive use of databases, which enable economists to analyze enormously complex micro-level data from a macroeconomic perspective

As for research topics, they have not changed that much—macroeconomics still focuses on growth and economic integration, as well as economic cycles and fluctuations. But the successive crises that we have witnessed in this last 12 years have shown that rare events have large and long-lasting global consequences and this needs to be taken into account.

There is no common agreement on what is to be to be researched and probably for a good reason as it's much better for each economist to develop their own research agenda. What probably needs to be done is taking human behavior into account, the way people interact and make decisions.

I think that there are two critical fields, globalization and the integration of financial constraints into the standard macroeconomic models

We need to better understand what financial constraints mean for the private economic agents as well as for the governments. As for globalization, our economic activities are more and more integrated and interdependencies get denser and denser by the day, which is perfectly exemplified by the pandemic.

The pandemic should not have surprised us. It's a rare event in a human lifetime but it's not a rare event in the history of mankind. Our shock comes from having erased from our memory the fact that pandemics could happen as we had confidence in our health system. The second reason is that for the first time this pandemic happens in a very complex and interconnected society where a small event may derail the economies. We are also more informed now, which makes the pandemic more disturbing. On the other hand, we have a much better understanding of what a virus is and the scientific achievements have been enormous. Still, we are in a state of uncertainty so that it is impossible to make viable long-term forecasts.

What I have observed is that public opinion and governments have had a ‘wishful thinking’ or ‘wishful living’ approach to the pandemic—‘let's hope that it is over’—and it also seems that the governments and the public authorities are scrambling for what to do. We are lacking a lot of information and understanding on these issues and that is the case for public authorities worldwide.

Future of Central Banks

The complexity of economy, in its financial and monetary aspects, in particular, and its fragility by nature (and by construction as some say) means that understanding what is going on requires a lot of expertise and a lot of attention to a lot of certainties. So, central banks certainly need the professional expertise of economists. In general, central banks are attentive to what is going on in the academic community.

Banks in different countries face different challenges and work in different historical and political configurations. Their in-house expertise may differ. But on the whole, central banks in advanced economies are consistently run and have a large in-house expertise capacity.

However, there is also a political challenge because central banks are becoming more and more important for the working of an economy and their responsibilities are increased tremendously, even though they are supposed to be neutral observers of the economy able to finetune it

Central banks act against the financial crises by introducing quantitative unconventional policies. The central banks in Europe, for example, have come to the rescue of states and made large transfers, giving them quasi tax receipts. Now they do the same with the pandemic, and for a good reason.

Central banks certainly need to be able to ‘act quickly, expertly, decisively’; they have to do whatever it takes to save the national economy, the regulations notwithstanding. This capacity must be left to them. Yet the enormous power, which is given to them, has to be put in check. The democratic control over these public institutions has to be refined.  This creates a contradiction between their need for independence and the necessity that they become accountable to public authorities and the public opinion

But the issue that is most important for our future is climate disorder

I’m pleased to see that public authorities are trying to respond to it and contribute to controlling the increase in temperature of the planet. Central banks have much more tools to deal with climate change than they think or are willing to use.

I have recently written a paper on greening the monetary policy arguing for more involvement of central banks at the level of their monetary policy. They can adapt their monetary policy tools to contribute to the fight against climate change.

There are experiments here and there of tailoring central monetary policy to global warming. The European Union is leading the way with its discussion of what is called the taxonomy [classification] of investments according to their contribution to the global warming. The idea is that some investments can be classified as very green, green, neutral, brown and very brown. Once agreed, this taxonomy will be the cornerstone for modifying monetary policy.

The interest rate policy implemented by the central banks should include bonuses or maluses to be applied to certain categories of investment. This idea has not been adopted by central banks yet. A recent study has proven that banks are less concerned about the brown content of investment they fund than equity markets so that is a problem central banks should address.

I think that central banks are definitely lacking initiative and capacities to innovate. They could do so much more. Every individual effort by a nation’s central bank counts as far as climate change is concerned. We have no time to waste so we’d better act quickly and decisively.

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