Green Central Banking Under High Inflation-More of a Need Than an Option: an Analytical Exposition for Turkey

Abstract

Motivation: Calls for a green monetary policy are intensifying as the climate crisis deepens. Although the leading central banks of low-inflation countries are the spokesmodels of this discussion, considerations of green central banking under high inflation continue to lag. The motivation of this article is to contribute to this process with a working example from Turkey-an economy under severe inflationary pressure.Purpose: Our first objective is to document the risks associated with climate change for the Central Bank of the Republic of Turkey (CBRT) in terms of its main mandate of price stability and to provide evidence to pursue green policies. We next examine the feasibility of a green monetary design under high inflation.Methods and approach: We scrutinize the duties and responsibilities of the CBRT as set by law and set out the armoury it would have at its disposal in pursuing a green monetary policy. Exhibiting climate change-related risks to its mandate(s), we find one climate policy-related and two mandate-related reasons for the CBRT to go green, matching them with robust green instruments.Findings: Adopting a green monetary policy has the potential to improve the CBRT's ability to reach its objective of price stability. Indicating that green central banking in a high-inflation country is more of a need than an option, we also document that greening of the monetary policy does not necessarily conflict with the broad mandates of inflation targeting and financial stability.Policy implications: Evidence from Turkey supports the greening of the CBRT. This call is both feasible in terms of its capabilities and critical as regards fulfilling the mandate. Furthermore, by exposing carbon bias in the country's loan portfolio, our findings support aligning monetary policy with emissions-abatement instruments, thus contributing to the overall design of Turkey's climate policies.