On the Green Interest Rate

Abstract

This paper demonstrates how a central bank might operationalize an expanded role inclusive of managing risks from environmental pollution. The analysis introduces the green interest rate (rg) which depends on temporal changes in the pollution intensity of output. This policy instrument reallocates consumption from periods when output is pollution intensive to when output is cleaner. In economies on a cleaning-up path, rg exceeds r*. For those growing more polluted, rg is less than r*. In the U.S. economy from 1957 to 2016, rg exceeded r* by 50 basis points. Federal environmental policy reversed the orientation between rg and r*.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.