Monetary Policy Innovation and Green Finance

As analyzed by Dafermos, Nikolaidi, and Galanis (2018), the potential of green quantitative easing (QE) to address climate-related financial instability offers significant opportunities for UK monetary policy innovation. The Bank of England's position as a leading central bank allows it to pioneer new approaches to integrating climate considerations into monetary operations. This includes developing targeted purchase programs for green bonds and implementing differential treatment of carbon-intensive assets.

Chan, Punzi, and Zhao's (2024) research on dual interest rate policies provides valuable insights into the UK context. Their findings suggest that combining monetary policy tools with fiscal measures supporting green consumption could effectively support both the green transition and financial stability. The development of green financial products, the creation of climate risk hedging instruments, and the enhancement of sustainable finance markets present significant opportunities for innovation.

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