Arbeitspapier

The preferential treatment of green bonds

We study the preferential treatment of green bonds in the Central Bank collateral framework as an environmental policy instrument. We propose a macroeconomic model with environmental and financial frictions, in which green and conventional entrepreneurs issue defaultable bonds to banks that use them as collateral. Collateral policy solves a financial stability trade-off between increasing bond issuance and subsidizing entrepreneur default risk. In a calibration to the Euro Area, optimal collateral policy features substantial preferential treatment, implying a green-conventional bond spread of 73bp. This increases the green bond share by 0.69 percentage points, while the green capital share increases by 0.32 percentage points, which in turn reduces pollution. The limited response of green investment is caused by higher risk taking of green entrepreneurs. When optimal Pigouvian taxation is available, collateral policy does not feature preferential treatment, but still improves welfare by addressing adverse effects of taxation on financial stability.

Language: Englisch

Bibliographic citation: Series: ECONtribute Discussion Paper ; No. 098

Classification: Wirtschaft
Financial Markets and the Macroeconomy
Central Banks and Their Policies
Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
Environmental Economics: Government Policy

Subject: Green Investment
Central Bank Policy
Collateral Framework
Corporate Default Risk
Environmental Policy

Event: Geistige Schöpfung

(who): Giovanardi, Francesco
Kaldorf, Matthias
Radke, Lucas
Wicknig, Florian

Event: Veröffentlichung

(who): University of Bonn and University of Cologne, Reinhard Selten Institute (RSI)

(where): Bonn and Cologne

(when): 2021

Handle: http://hdl.handle.net/10419/237343

Last update: 10.03.2025, 11:41 AM CET

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Object type

Arbeitspapier

Associated

Giovanardi, Francesco
Kaldorf, Matthias
Radke, Lucas
Wicknig, Florian
University of Bonn and University of Cologne, Reinhard Selten Institute (RSI)

Time of origin

2021

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Arbeitspapier