Monetary Policy and Sustainability

Monetary policy has wide ranging effects on the economy and society as a whole. The actions taken by central banks with regard to interest rate levels, inflation targets, and exchange rates are key factors in investment decisions and play a significant role in the distribution of wealth and income. They also have critical impacts on social security systems and the ability of savers to secure adequate real income over their lifetime. Their influence on asset prices and volatility in general and commodity prices in particular are further cases in point with considerable social and environmental repercussions.

Nonetheless, the links between monetary policy and a broad sustainability agenda that strengthens individual opportunity, social cohesion and environmental stability are rarely reflected in policy debates. The nexus between central bank decisions and sustainability are seldom on top of agendas. Bringing light to this blind spot is critical.

Against this background, CEP launched a program on “Monetary Policy and Sustainability” in summer 2012 to advance research, raise awareness and build up an international community of experts on the topic. This conference was a key milestone in this process and convened over 20 participants from central banks, academia, IGOs, think tanks, NGOs and the media to review existing research, define an agenda to further explore the topic, and offer a platform to identify opportunities for cooperation and joint research initiatives. The event was generously hosted by the Bellagio Center of the Rockefeller Foundation.

Guiding questions

The following questions provided initial guidance. Further topics were identified during the event:

• What is the impact of current monetary policies on sustainability – in particular with regard to inequality and resource security?
• What are the effects of inflation on sustainability?
• What are the environmental and social impacts of low interest rates? Do current low interest rate levels endanger our social security systems? Do high interest rates increase short-termism because they lead to higher discounting of the future in discounted cash flow models?
• What are the social and environmental effects of sector and regional biases in monetary policy and how could negative effects be reduced?
• What are the sustainability effects of exchange rate interventions within and between countries?
• What are plausible scenarios for the future impact of monetary policy – in particular an unwinding of QE – on sustainability?
• Are there alternative approaches to current monetary policies that remain within central bank mandates and would be better aligned with a broad sustainability agenda?
• What are ideas for monetary reforms that would strengthen this alignment?