Masciandaro analyzes the green monetary and banking policy challenges for the ECB

Donato Masciandaro, Baffi honorary president and MONETA research unit director, is also the Bocconi investigator of “CHANGE – CHAllenges in the National Governance of the Environment” research project. We have asked him some questions about the project.

When have you started this research project?

In September 2023 Italian fellows contacted me and the occasion  seemed me to be a good opportunity for funding the overall research activity of the Baffi Center. In fact  I accepted under the condition to avoid any personal research grant.

Who is funding this research project? 

Ministero Università e Ricerca (MUR) and PRIN financed within the Next Generation EU initiative are financing this project.

What is the aim of the research project?

Aim of the project is to contribute to the strategic theme "Democratic governance is re-invigorated by improving the accountability, transparency and effectiveness of democratic institutions, safeguarding fundamental rights and the rule of law, and tackling multidimensional threats", as articulated in the strategic emerging topic "Human Wellbeing". This will be done adopting a perspective coherent with the theory and tools belonging to the ERC sector SH1 (Economics, Finance, management).

The main focus of the project is on the role that democratic institutions can play to safeguard and advance human well being by effectively tackling the challenge of climate change. I zoomed my research attention on the European istitution that I know better, i.e. the ECB. Specifically, the project will analyze the frictions hampering the formation and coordination of national environmental governance. Providing insights and new information on the obstacles to environmental policies enables a larger participation to the current debate on the strategies to tackle the current climatic challenge, allows to uncover the multidimensional dimensions of this threat and favor the formulation of policy recommendations, improves the transparency of national institutions and our understanding of the role that the quality of democratic institutions may play in this matter.

What are the research questions? 

The project is articulated in two parts. The first is dedicated to the understanding of the role that electoral constraints play in determining the choice of legislator over matters that concur to the formation of a national environmental governance. The second will examine how the heterogeneity of countries in terms of their political institution and interests in environmental protection may hamper the coordination of their national environmental governance on common issues. Each part of the project consists of two work packages (WP), one conducted by the research units of Bocconi University and Sapienza University of Rome, and the other conducted by the research units of Ca' Foscari University of Venice and University of Padova.

Why this topic matters for people? 

The project stated that the impact of current environmental challenges crucially depends on future policies and planning (Intergovernmental Panel on Climate Change, 2022). Despite the importance of an environmental governance, however, green policies are kept below the suggested optimal level. 

Thanks to WP1 on environmental legislation, this project  aims to provide several contributions. First, it wishes  to create and make publicly available a new dataset for further analysis to be conducted on the drivers of green voting. Second, it wishes to provide a theoretical framework and empirical method which could be easily replicated to search for common patterns in the voting behaviour of legislators in different countries and at different levels (e.g., state vs country-level). Third and most importantly, by reconciling different strands of research on the drivers of green voting, the project wishes to provide a comprehensive assessment of the main factors influencing a legislator's choice to adopt a pro-environment behaviour.

Regarding WP2 on intergenerational sustainable climate resources, the calibrated version of the research setting will serve the scope to analyse the effects of varying climate impacts on the design of the optimal sustainable climate policies. The implementation of the optimal sustainable conservation plan calls for a mechanism of financial compensation to current generations who bear the cost of conserving the environment.

Concerning WP3 on structural estimation of environmental treaty foundation, the project wishes to contribute to the empirical literature on the influence of domestic policymakers and interest groups on ratification choices by providing the first large-sample dataset merging information on signature and ratification of environmental agreements with information related to political term lengths, election dates, and party-level and citizen-level data on environmental preferences.

Regarding the impact of institutions on the efficient management of environmental resources, a number of contributions will be offered by this project. First, it wish to  create and make publicly available a new dataset providing the first global measure of agricultural productivity along with standard metrics of institutional and environmental quality, which can contribute to studies conducted in many research streams. Second, it wish to complement the existing literature on economic growth, by providing the first evidence on the role that institutions play in shaping agricultural activities in the short and medium run. Third, it wish to contribute to the current debate on the role that democratic societies, with respect to less liberal regimes, can have in the current combat to climate change.

Which data the research group are analysing? 

At the best of my knowledge, the data the research group plan to collect tracks ratification decisions of all multilateral environmental agreements, comprising 443 multilateral environmental agreements and 209 countries between 1980 and 2018. The dataset will be one of the most comprehensive datasets applied in this field of research, which will contain information on country-year level characteristics like political regimes and political cycles, dyadic information related to trade flows and treaty level characteristics, such as treaty subject and the actual treaty text.

Again the best of my knowledge, The main source of data will be the "International Environmental Agreement Database Project" (Mitchell, 2020). These data will be integrated with data coming from various sources, such as satellite data (NASAs Socioeconomic Data and Applications Center, SEDAC, and NASAs Earthdata) or social media data (Climate Change Conversation Map, Meta) to identify potential instruments for causal inference of mechanisms at work.

What is the state of the project at the moment? 

Regarding my research output, I have been involved in the production of two studies.  A first study – published in Economic Modelling -  identified the trade–offs that central banks would face if they were to start tackling climate change. The array of instruments they could use to mitigate climate–related risks overlap with those already used in relation to their monetary and macroprudential mandates, and most of the current literature does not properly account for the political–economy dimension of this phenomenon. This results in a bias in favour of central banks’ interventions. By leveraging on a political principal–agent setting that eliminates this bias, we consider the conditions under which the central bank architecture would be fit to take on this objective without jeopardising the attainment of central banks’ core mandates. 

In a second study – published in Macroeconomic Dynamics -  we develop a political–economy setting, which can be interpreted as a memorandum that government and central bank can implement. Through it, the former legitimises, or pushes for, the intervention of the latter under the aegis of an elected authority. This setting eliminates the bias, unveiling the trade–offs that could result: accounting for and tackling climate risks could lead central banks to miss their policy targets, not necessarily making “brown” firms greener, and result in welfare distortions. Yet, thanks to this memorandum, the possibility of a green transition favoured by the central bank is made possible. 

Is there any conclusion that you can share regarding your research? 

From the first study, we reach the conclusion that the effectiveness of the central bank involvement in climate change issues depends on its calibration capacity, independence and degree of activism. From the second study, we conclude that central banks should keep a cautious stance when deciding to enter the climate arena, and that different evaluations of these risks can be interpreted as a reason why central banks around the world have adopted different degrees of climate interventionism. Both studies offer systematic indication to analyse and evaluate the present and future action of the ECB.