Revisiting monetary policy and price stability in the green transition

The low-carbon transition is a structural transformation of historic proportions. It will reshape energy systems, production processes and consumption patterns across the global economy over the coming decades. While decarbonisation supports long-term price stability by reducing exposure to climate-related supply shocks and fossil fuel price volatility, the policies required to drive it may generate short- to medium-term inflationary pressures that conventional monetary frameworks are ill-equipped to handle.

This report explores how to navigate these trade-offs. The authors propose a revised institutional architecture that ensures strategic consistency between monetary and fiscal policy.

Core recommendations

A successful green transition is a precondition for price stability in the long term. Policymakers have several main options for maintaining such stability:

• First, they could adopt adaptive inflation targeting (Adaptive-IT). This involves enhancing the flexibility of the existing inflation targeting framework to allow central banks to ‘look through’ transient supply-driven price spikes for longer periods, leaving more space for fiscal policy to respond to first-round effects.
• Second, where monetary tightening becomes necessary, the design of monetary operations could be adjusted to protect the green transition from the repercussions of restrictive policy. For example, climate-related adjustments to collateral frameworks could favour assets that are aligned with the green transition. While such measures depart from the principle of market neutrality, there is a case for doing so.
• Third, an institutional architecture for systematic monetary–fiscal coordination could be developed. The design of arrangements within this architecture will vary across jurisdictions, but will likely require changes to central banks’ internal governance, new multi-stakeholder coordination bodies and closer collaboration at the international level.