Should central banks consider climate change while making monetary policy? Here's what Kenneth Rogoff has to say

An unusual question was raised in the public central banking debates by an unusual person. Urjit Patel, former governor of the Reserve Bank of India raised the important issue of climate change, saying that central banks have to take into account climate change when they make monetary policy.

Patel's argument is that central banks are supposed to estimate potential output and if actual output is faster than potential output then they have to raise interest rates. If you take the last 20 years' experience, then you would arrive at a higher potential output because you would not be factoring in climate change impact. Therefore, you would be perhaps overestimating potential output and keep the policy more accommodative than it should be.

In direct contrast to this, former RBI governor Raghuram Rajan said central banks should steer clear of green policy and that is the domain of the sovereign. So there are dramatically opposite positions or differing positions.

Inflation in India likely to ease only gradually: RBI Deputy Governor

Kenneth Rogoff, professor of Economics at Harvard University in his articles said if central banks promise too much then they are going to fail miserably at some point in time.

In an interview with CNBC-TV18s Latha Venkatesh, Rogoff said, "If you are thinking over a 75 or 100 year period, I certainly agree that climate change is one of the most pressing issues facing mankind. I agree, however, with Raghuram Rajan that this is not the main role of central banks. Central banks need to think about preserving financial stability, preserving inflation stability, they are not in charge of putting on a carbon tax. I think central banks should be followers. Whatever is the government's long term institutional, political, economic objectives in the area of climate change, the central banks could execute them but I don't know if they can be rebels."