Climate Change, Financial Stability and Monetary Policy

Ecological Economics, Vol. 152, pp. 219-234, 2018

Posted: 7 Jan 2019

See all articles by Yannis Dafermos

Yannis Dafermos

SOAS University of London

Maria Nikolaidi

University of Greenwich

Giorgos Galanis


Date Written: October 01, 2018


Using a stock-flow-fund ecological macroeconomic model, we analyse (i) the effects of climate change on financial stability and (ii) the financial and global warming implications of a green quantitative easing (QE) programme. Emphasis is placed on the impact of climate change damages on the price of financial assets and the financial position of firms and banks. The model is estimated and calibrated using global data and simulations are conducted for the period 2016–2120. Four key results arise. First, by destroying the capital of firms and reducing their profitability, climate change is likely to gradually deteriorate the liquidity of firms, leading to a higher rate of default that could harm both the financial and the non-financial corporate sector. Second, climate change damages can lead to a portfolio reallocation that can cause a gradual decline in the price of corporate bonds. Third, climate-induced financial instability might adversely affect credit expansion, exacerbating the negative impact of climate change on economic activity. Fourth, the implementation of a green corporate QE programme can reduce climate-induced financial instability and restrict global warming. The effectiveness of this programme depends positively on the responsiveness of green investment to changes in bond yields.

Keywords: Ecological Macroeconomics, Stock-Flow Consistent Modelling, Climate Change, Financial Stability, Green Quantitative Easing

JEL Classification: E12, E44, E52, Q54

Suggested Citation

Dafermos, Yannis and Nikolaidi, Maria and Galanis, Giorgos, Climate Change, Financial Stability and Monetary Policy (October 01, 2018). Ecological Economics, Vol. 152, pp. 219-234, 2018, Available at SSRN:

Yannis Dafermos

SOAS University of London ( email )

Thornhaugh Street
Russell Square
London, WC1H 0XG
United Kingdom

Maria Nikolaidi (Contact Author)

University of Greenwich ( email )

30 Park Row
London, SE10 9LS
United Kingdom

Giorgos Galanis

Independent ( email )

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