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Does the ECB policy of quantitative easing impact environmental policy

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Does the ECB policy of quantitative easing impact

environmental policy objectives?

Nathalie Hilmi , Salpie Djoundourian , Wassim Shahin & Alain Safa

To cite this article: Nathalie Hilmi , Salpie Djoundourian , Wassim Shahin & Alain Safa (2021):
Does the ECB policy of quantitative easing impact environmental policy objectives?, Journal of
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JOURNAL OF ECONOMIC POLICY REFORM
https://doi.org/10.1080/17487870.2020.1855176

Does the ECB policy of quantitative easing impact

environmental policy objectives?
Nathalie Hilmia, Salpie Djoundourianb, Wassim Shahinb and Alain Safac
a
Department of Environmental Economics, Centre Scientifique De Monaco, Monaco; bDepartment of
Economics, Adnan Kassar School of Business, Lebanese American University, Byblos, Lebanon; cStudies
Department, SKILL PARTNERS, Grasse, France

ABSTRACT ARTICLE HISTORY

The relationship between the environment and climate change on Received 11 June 2019
one hand and the financial system, financial regulation and mone­ Accepted 20 November 2020
tary policy on the other is growing in importance. This paper KEYWORDS
examines the possible impact of the European Central Bank’s Quantitative Easing;
monetary policy of quantitative easing on the environmental policy European Central Bank; EU
of the European Union. Using data from Climate Bonds Initiative, Environmental Policy; green
the paper analyses the variation in the amount of “green labelled bonds
bonds” issued in the individual member countries of the Eurozone
areas, as a function of liquidity inducing monetary policy variables.
The paper finds a positive and significant relationship between the
two measures.

I. Introduction
Climate change, global warming, greenhouse gas emissions, transition to low carbon
economy, and the financial risks associated with these environmental issues are bold
headlines that national and regional monetary policy makers will have difficulty ignoring.
The regulatory environment is changing in favor of tightening emissions and energy
efficiency standards. The opportunities for technological advancement in energy effi­
ciency are proving profitable. In addition to changes in consumer preferences towards
becoming more environmentally conscious, there has been an increase in the number of
pressure groups advocating divestment of fossil fuel assets. The threat of climate change
on financial stability is gaining momentum. Businesses already realize many of the
impacts of climate change on market risks and opportunities. The threat of damages to
physical structures due to more frequent and severe weather events is increasing over
time. Such events reduce the profitability of some firms (insurance industry) and could
deteriorate their financial position (Hoeppe 2016). Climate change increases loan
defaults with adverse effects on bank leverage; it also contributes to asset price deflation
(Dafermos, Nikolaidi, and Galanis 2018).
Article 191 of the Treaty on the Functioning of the European Union (TFEU) explicitly
includes preserving, protecting and improving the quality of the environment, protecting
human health, utilizing natural resources prudently and rationally, and promoting

CONTACT Salpie Djoundourian sdjndran@lau.edu.lb

© 2021 Informa UK Limited, trading as Taylor & Francis Group
2 N. HILMI ET AL.

measures at international level to deal with regional or worldwide environmental pro­

blems, and in particular combating climate change. The Paris Agreement and the many
prior commitments of the European Union (EU) to the world community require a
structural shift in the economies of the member states. The transition to “green econ­
omy” requires a change in the sectoral composition, technology adaptation, and the
nature of labor markets. For instance, many oil producing firms will not be able to access
and extract the available fossil fuel reserves and, as such, asset prices of these firms will
eventually fall, necessitating firms to find alternative opportunities to remain competi­
tive. Policymakers would be able to use monetary and fiscal policy instruments to
promote alternative investments (in technology) that are climate friendly. While fiscal
policy instruments including command and control regulations, taxes, subsidies, and
emissions trading schemes are frequently used in solving many environmental issues,
there have been recent calls for a systematic and coherent synergy between monetary and
environmental policies in the EU and the Eurozone (See Anderson 2015; Matikainen,
Campiglio, and Zenghelis 2017; Steiner 2016; Murphy and Hines 2010).
In its continuous effort to protect the environment, the EU has established self-
imposed targets for reducing its greenhouse gas emissions progressively up to 2050.
Emissions in the EU were reduced by 23% between 1990 and 2016, while the economy
grew by 53% over the same period (EC, Climate Action – European Commission 2020b).
The 2030 climate and energy framework, building on the 2020 goals, sets three key targets
for the year 2030: at least 40% cuts in greenhouse gas emissions (from the 1990 levels); at
least 27% share for renewable energy, and at least 27% improvement in energy efficiency.
These targets will help put the EU on the way to achieving the transformation towards a
low-carbon economy as detailed in the 2050 low-carbon roadmap. The roadmap suggests
that the EU should cut its greenhouse gas emissions, with contributions from all
economic sectors, to 80% below 1990 levels, and significant milestones of 40% emissions
reduction by 2030 and 60% by 2040 (EC, Climate Action – European Commission
2020a).
The global financial requirements for the structural transition to a low carbon
economy are huge. The International Energy Agency (IEA) estimates that a cumulative
investment of 53 USDtn is required by 2035 in the energy sector alone (OECD/IEA
2014), while the New Climate Economy (NCE) predicts the value of cumulative invest­
ments to reach 90 USDtn by 2030 across the whole economy (NCE, New Climate
Economy 2018). According to Citi, the global investment on fuel costs and capital
expenditures is expected to reach 190.2 USDtn by 2040 (versus a cost of inaction estimate
of 192 USDtn). The EU projects that its average annual additional investments will
increase by €38 billion over the period 2011–2030, with more than 50% of investments
being in the residential and tertiary sectors, with fuel savings from increased efficiency
compensating to a large extent for the additional costs.
For the last five years, the European Central Bank (ECB) has continuously been
adopting nonconventional quantitative easing (QE) policies to address the risks of a
prolonged period of low inflation through several programs including asset backed
securities and covered bond purchases. The cumulative holdings of ECB under the
expanded asset purchase program amounts to € 2,579,479 million, at month end
December 2019 (ECB, European Central Bank 2020a). Since 2016, the ECB has been
purchasing corporate bonds from various industries including oil, gas, transportation,
 JOURNAL OF ECONOMIC POLICY REFORM 3

and telecommunication, among others. Although corporate bonds represent less than
6.5% of total ECB asset holdings, these purchases could render climate friendly if ECB
chooses to fund investments that help the transition to low fuel production methods. The
sectoral distribution of the ECB corporate holdings indicate a disproportionate allocation
on industries that use fossil fuels. By easing borrowing conditions, the ECB policy, if
implemented strategically, could potentially promote the production and use of renew­
able energy sources and significantly affect the composition of economic activity.
Renewable energy investment is more capital-intensive than fossil energy, so it will
benefit the most from QE. Capital spending is crucial in the transition towards low-
carbon economy. The role of environmental policy is to exploit this opportunity and
target capital spending towards low-carbon projects.
Climate change is a global crisis with direct implications to the EU and requires both
institutional and targeted responses. D’Erman, Schure, and Verdun (2020), in their
critical analysis of the last decade of economic and financial governance in the EU,
argue that crises create consensus and allow for setting new objectives and targeted
responses. They also conclude that institutional change in the EU during times of crisis is
inspired by previously conceptualized or adopted institutional structures as researched in
Henning (2020) and Mourlon-Druol (2020).
The objective of this paper is to test empirically a model that examines the impact of
monetary policy instruments on environmental policy objectives through the green
credit channel, using data from the Climate Bonds Initiative for the period 2013–2018.
More specifically, we analyze whether the ECB’s Asset Purchase Programs (APPs)
promote, as a byproduct, environmental policy objectives in addition to the intended
objectives of monetary policy. Policy coherence requires that ECB actions reconcile well
with plans and strategies adopted by the EU national governments and communicated in
their nationally determined contributions (NDCs) as part of the Paris Agreement
(UNFCCC, United Nations Framework Convention on Climate Change 2020). It is
important to note that ECB’s mandate is to conduct monetary policy to assure price
stability as per the Maastricht Treaty. However, ECB may use policy coherence as an
argument when pursuing complementary policies. Therefore, any action ECB takes to
serve its objectives and in the process serve the environment or support the general
economic policies of the EU would be legal, and presumably, welcomed.
The paper is organized as follows: section II previews the experience of ECB monetary
policy with quantitative easing (QE); Section III reviews the literature pertaining to QE
transmission mechanism and develops a model linking monetary policy to environmen­
tal outcomes. Section IV empirically tests the model and Section V concludes with
recommendations

II. ECB experience with QE

The financial crisis of 2008 caused major negative impacts in the Eurozone reflected in
declines in growth rates from highs of 6% before the crisis to −4%, and major increases in
unemployment rates from lows of below 7.5% to 12%. The decline in inflation rates at the
end of 2008, as indicated clearly in Figure 1, allowed the ECB to rely on the conventional
policy of interest rates cuts to activate the economy, without adversely endangering price
stability. The ECB aimed at maintaining inflation rates below but close to 2% based on a
4 N. HILMI ET AL.

Figure 1. Harmonized index of consumer prices (HICP) for the Eurozone (ECB).

harmonized index of consumer prices (HICP) for the Eurozone member countries.
Figure 2 presents the evolution of the key interest rates of the ECB. Interest rates on
deposit facilities at the ECB, rates on the main refinancing operations, and rates paid on
marginal lending facility were reduced several times between 2008 and 2009 reaching
their lowest historical levels. The ECB reverted to increase these rates at the beginning of
2011 in an attempt to restore price stability in response to the euro area inflation
surpassing 2%, before reducing interest rates yet again. These reductions persisted
since then on a yearly basis until 18 September 2019, where they have remained effective
to date. The interest rate on deposit facility currently stands at −0.5%, with the rate on the

Figure 2. Key interest rates of the European Central Bank (ECB).

 JOURNAL OF ECONOMIC POLICY REFORM 5

main refinancing operations at 0%, and the one on the marginal lending facility at 0.25%
(ECB, European Central Bank 2020b)
In addition to the conventional measures, the ECB adopted some non-conventional
measures by providing credit support to the banking system. These measures included: 1)
unlimited liquidity provisions to banks at fixed interest rates, against adequate collateral;
2) increasing the maturity of the refinancing operations from three months to one year;
3) the extension of assets accepted as collateral; 4) the provision of liquidity in foreign
currencies, partly conducted through liquidity swaps with the US Federal Reserve
System; and 5) asset purchases in the covered bond market (ECB Monthly Bulletin
2012). In addition, the ECB introduced long-term refinancing operations (LTROs) and
announced its first supplementary LTRO with a six months maturity in March 2008, its
first twelve months LTRO in June 2009, its first LTRO with a three year term in
December 2011, and its second LTRO with a three year term in February 2012 lasting
until February 2015. These long-term targeted refinance operations as announced by the
ECB were conducted through at least March of 2017 on a quarterly basis in order to boost
liquidity, achieve economic growth and curb inflation to reach the desired target levels of
below, but close to, 2% over the medium term. The ECB viewed each iteration as a
continuation of pre-existing policy, with additional objectives and targets added, to
achieve both economic growth and price stability.
In May 2009, the ECB introduced the covered bond purchase program (CBPP),
through which it purchased €60 billion of these bonds in a program called CBPP1
(program ended in 2010 after all purchases were completed) and followed by another
€16.7 billion in November 2011 in a program called CBPP2 (program ended in 2012 after
all purchases were completed).
In January 2015, the ECB announced the decision to resume QE programs motivated
by the weak economic recovery, the reduction in inflation rates to levels nearing zero, and
the uncertain impact of the conventional expansionary monetary policy. When the
United States of America (USA) and the United Kingdom (UK) adopted QE in 2009,
the levels of inflation rates prevailing in the Eurozone were close to and sometimes
exceeding 2% (as indicated in Figure 1) not allowing the ECB to conduct QE based on the
hierarchical mandate of price stability stipulated in the Maastricht Treaty. Thus, the APP
became a sought after strategy only after the inflation rate reached nearly zero enabling
the ECB to prevent deflation while simultaneously achieving growth. The APP allocated,
starting March 2015, an amount of € 60 billion per month and continued to do so until
the end of September 2016, where it was expected that the inflation rates will readjust to a
level closer, but still less than, 2%. However, in its meeting of 3 December 2015, the ECB
decided to extend the APP until March 2017 at the least, by including more assets among
the purchased ones and extending the list of assets regularly to provide the necessary
liquidity. The program that started in March 2015 included the third covered bond
purchase program CBPP3, the asset-backed securities purchase program, and the public
sector purchase program. The APP continued until December 2018 allocating a total
amount of € 2.6 trillion. On 12 September 2019 the ECB Governing Council decided that
the APP will resume on 1 November 2019 at a monthly pace of €20 billion. The
Governing Council expected the program to run for as long as necessary to reinforce
the accommodative impact of its policy rates, and to end shortly before it starts raising
the key ECB interest rates. On 12 March 2020 the Council decided to add a temporary
6 N. HILMI ET AL.

envelope of additional net asset purchases of €120 billion until the end of the year (ECB,
European Central Bank 2020a).

III. Impact of QE: literature review

The various objectives of QE revolve around two outcomes. The first is to stimulate
economic activity after all conventional and other unconventional measures have been
depleted, with interest rates reaching near zero. The second is to prevent deflation which
may accompany several recessionary periods. Similar programs were able to achieve such
objectives in Japan, the USA and the UK. The existing empirical literature on QE includes
examples from various countries adopting these measures, in the aftermath of the
financial crisis of 2008. Our review of the literature highlights the type of models used,
the nature of empirical specifications, the variables involved and the obtained results,
especially those concerning the relevant transmission mechanisms for such policies. The
effectiveness of these policies on the real economy and the transmission mechanisms of
QE, especially through the credit channel, are crucial for the success of ECB policies.
The empirical methodology, as summarized in Shahin and El-Achkar (2017), is of two
types: event studies and the more sophisticated econometric models. Event studies show
that for the first QE attempt in the USA, the ten year government bonds yields were
reduced by 100 basis points while the five year ones by around 85 basis points. For the
second QE attempt, evidence is mixed and with no indication of a large impact. In the UK,
differing estimates were reported ranging between 40 and 100 basis points on the long-
term gilt yields after the first QE attempt, with no reduction after the second attempt and
very small effects after the third (Martin and Milas 2012). Econometric studies are also
mixed and reveal smaller impacts than those in event studies. However, in both types of
studies, the impacts of the first QE attempts were stronger and more significant than the
impact of further attempts due to various factors including the announcement and the
expectations effects of the second rounds, more rapid portfolio adjustments in the latter
periods, and the fact that unconventional policies may be more effective in reducing bond
rates the higher are these rates. Some of the more recent studies reveal no statistical
significance for the portfolio balance channel measuring the impact on long-term yields
with the possibility of the signaling or the forward guidance channel playing a role
(Thornton 2014).
Given the mixed impact of the liquidity view on interest rates, expansionary effects of
QE were possibly felt more through the credit view and the asset price channels. The
results of the credit view may be more relevant given that the present paper addresses the
impact of QE on the proxy for environmental credit and whether QE causes an increase
in bank lending. Butt et al. (2014) tested whether QE increased bank lending in the UK by
examining the variations in deposits relative to the loans in the balance sheet of
individual banks. While there was no significance to this fact, this does not preclude
QE from operating through other credit channels given that QE increases both banks’
and consumers’ confidence in the future of the economy, triggering more loan activity.
The plausibility of achieving alternative impacts such as promotion of environmentally
friendly loans and investments would be an additional measure of QE success.
The asset price channel of QE through a reduction in the value of domestic currency
found support in the USA and the UK. Neely (2015) showed that the first QE led to the
 JOURNAL OF ECONOMIC POLICY REFORM 7

depreciation of the US dollar by 4–11% depending on the currency and Glick and Leduc
(2011) found that the first QE attempt in the UK also impacted the value of the sterling
causing it to depreciate by 1.5–3.5% depending on the currency.
The impact of QE on the real economy may be complicated by several other con­
tributing factors such as fiscal policy and spillover effects in open-economies. Thus,
model-based policies and no-policy counterfactuals (related to what would have hap­
pened to the real sector in the absence of unconventional policies) were largely used in
studies differing in terms of methodologies, impacts, magnitudes and countries using
case analysis, dynamic stochastic general equilibrium models, vector auto regression
models, and others. The outcomes of various studies show that unconventional monetary
policy was successful in both the USA and the UK in reducing the unemployment rate
and preventing recessions and deflationary episodes. However, these results are to be
taken with caution since fiscal and regulatory policies could have also impacted the
macro-economy. Thus, for the purpose of the present paper and extrapolating the
experience of other countries that have adopted QE to the Eurozone, it becomes inter­
esting to review the early impact of the latest asset-purchase programs of the ECB on the
real economy. Joyce et al. (2012) summarized the literature on the ECB’s unconventional
policies prior to these latest programs and showed that the monetary policy of the ECB
has been effective in supporting and stimulating the Eurozone economy since the
beginning of the financial crisis. In fact, unconventional monetary policies of the ECB
seem to have had significant impacts on loans and interest rates and on boosting the real
sector (with a delay) and increasing inflation rates. Industrial production in some studies
was shown to be 2% higher than it would have been, and the unemployment rate 0.6%
lower due to the ECB’s monetary policy. The study of Dafermos, Nikolaidi, and Galanis
(2018) examines the effects of climate change on financial stability emphasizing the
impact of climate change damages on the price of financial assets and the financial
position of firms and banks. The study argues that green QE programs are likely to
have implications for combatting global warming in addition to the more traditional
objective of promoting financial stability. Specifically, the model suggests that the imple­
mentation of a green QE program can reduce climate-induced financial instability and
restrict global warming. The effectiveness of the program increases with the responsive­
ness of green investment to changes in bond yields.

IV. Methodology and Estimation

The ECB’s various QE policies allow businesses to gain better access to credit, boost
investment, create jobs and thereby support overall economic growth. As discussed in the
previous section, the empirical literature on QE is largely based on models that examine
the impact of unconventional policies on three variables of interest, namely, interest rates
reflected in all maturities of government bond yields, other asset prices such as exchange
rates, and the macro-economy at large especially unemployment, growth and inflation
rates. The novelty in this paper is in the investigation of the possible relationship between
the asset purchase programs of the ECB and the prevalence of green bonds in the
Eurozone as a proxy for environmental loans.
The paper attempts to identify whether the monetary authorities have the opportunity
to make QE contribute to the structural transition to a green or greener economy. The
8 N. HILMI ET AL.

basic model that we propose assumes that a central bank, or any entity making use of
liquidity created by QE, would be able to induce green investment opportunities by
purchasing debt (bonds) from private and/or public sector, whenever the borrowers
demonstrate that the money will be used to enhance the environment.
We posit the following general panel model to test our hypothesis of QE impact on
environmental policy objectives:

Yit ¼ αt þ βXit þ γZi þ μiþ εit

where Yit corresponds to some environmental outcome variable for country i at time
period t. The environmental outcome could be one of many possible indicators such as
ambient concentration levels of pollutants in the air, water, and land, or other indicators
of environmental performance, assuming availability of such data. αt is an intercept term
that can be different for each time period. Xit represents a set of time varying monetary
policy variables corresponding to country i and time t. Zt represents variables that vary
over time but common to all ECB countries. μi and εit are both error terms. εit varies
across each country and each time period, whereas μi varies only across countries.
The model would ideally be able to tell us whether changes in ECB QE policy variables,
holding other things constant, would affect the environmental performance indicator.
We use monthly data from Climate Bonds Initiative on the total amount of green-
labelled bonds (GLBit) issued in countries of the Eurozone. This variable is used as a
proxy for environmental indicator or outcome. GLBs earmark proceeds for climate or
environmental projects and are labelled as “green” by the issuers. We use the following
set of independent variables (Xit) that vary across ECB countries over time: M3it as a
measure of liquidity, monthly data by country published by the national bank, and
Intrateit representing the long term interest rates, monthly data by country from ECB.
In addition, we use the following variables that are common to the ECB countries but
vary over time: APPt representing the total value of ECB’s asset purchase program,
monthly data from ECB and AtmCO2, the mean monthly reading of atmospheric CO2
from NOOA, as an indicator of the ambient environmental quality.
The specified model above allows us to determine the sign and significance of the
relationship between the monetary policy variables and the amount of GLBs across
countries and over time. The green bond market kicked-off in 2007 with the AAA-
rated issuance from multilateral institutions such as the European Investment Bank (EIB)
and the World Bank. Climate Bond Initiative tracks and reports all self-labelled green
bonds. Europe dominates the climate aligned bond universe with the highest volume of
outstanding bonds (US$ 509bn) (Climate Bonds Initiative, 2018). Green bonds are
becoming more and more popular globally and are being listed exclusively on several
stock exchanges including the Oslo, Stockholm, London, Luxembourg and Borsa
Italiana. Figure 3 presents the total value of green-labelled bonds issued by countries of
the Eurozone during the period 2013–2018. France has the largest amount of bonds
issued, followed by Germany, Netherlands and Spain.
Inspection of the data reveals that while the GLB varies dramatically between coun­
tries, the variation within each country is much higher over time than the variation
between countries. This is not surprising, since many of the countries report issuing zero
amounts of green labelled bonds in many consecutive periods. In the empirical analysis,
 JOURNAL OF ECONOMIC POLICY REFORM 9

Figure 3. Green Labelled Bonds (2013–2018) in US $ (Climate Bonds Initiative).

we exclude Estonia and Lithuania due to data limitations. The remaining data represent a
balanced panel of 13 countries observed over 70 months, commencing with January 2013
and ending with September 2018, for a total of 910 observations. The frequency of
observing issuance of bonds is 157 out of 910 observations, representing less than 20%
of total data points.
There is a wide variation between countries in the total value of bonds issued as well as
in the frequency of issuance of such bonds over time. Table 1 presents the frequency
distribution of GLB issues in the period indicated, ranging between less than 2% for
Portugal and Slovenia and approximately 76% for France.
Table 2 presents an expanded summary statistics on the variables used in the analysis.
It reports the mean and the detailed standard deviation for each of the variables used in
the econometric model. The dependent variable, GLB, has a mean of 1.52 × 10°8 with an
overall variation of 5.78 × 10°8. The monetary policy variables M3 exhibit higher

Table 1. Frequency of reporting a non-zero value for Green Labelled

Bonds (GLB).
Country Number of months Frequency (in percentage)
Austria 5 7.14
Belgium 3 4.29
Finland 3 4.29
France 53 75.71
Germany 35 50
Ireland 2 2.86
Italy 12 17.14
Latvia 3 4.29
Luxembourg 2 2.86
Netherlands 19 27.14
Portugal 1 1.43
Slovenia 1 1.43
Spain 18 25.71
Source: Climate Bonds Initiative (2018)
10 N. HILMI ET AL.

Table 2. Summary statistics for variables used in the analysis.

Variable Mean Std. Deviation Min Max
GLBa 1.52x10°8 Overall 5.78x10°8 0 7,.88x10°9
Between 2.27x10°8 210,140 7.72x10°8
Within 5.36x10°8 −6.2x10°8 7.26x10°9
M32 2,036,062 Overall 2,292,040 21,571 7,799,897
Between 2,379,421 24,718 7,206,138
Within 146,863 1,593,981 2,874,884
Intrate3 1.57 Overall 1.29 −0.15 7.06
Between 0.83 0.68 3.47
Within 1.02 −0.24 5.81
APP3 37,636 Overall 31,172 0 85,427
Between 0 37,636 37,636
Within 31,172 0 85,427
AtmCO24 402.35 Overall 4.62 393.45 411.24
Between 0 402.35 402.35
Within 4.62 393.45 411.24
a
Climate Bonds Initiative (2018); 2National Banks of individual Countries; 3European Central Bank databases; 4NOAA
(2018).

variations between countries than within countries whereas the Intrate exhibits more
variation within countries.
Given the nature of the data, we estimate the panel model using the econometrics
software STATA, for two specifications of the dependent variable. The first specification
presents GLBit as continuous variable that reflects the monetary value of the bonds. We
then estimate the coefficients of the model using the linear fixed effects panel model, with
robust and clustered standard errors. The second specification uses GLB Dummyit as
binary variable that we construct such that it takes on the value of 1 when there is any
amount issued in a given month, 0 otherwise. The binary variable specification allows us
to use a logistic regression that would estimate the probability of observing issuance as a
function of the variables used in the model.
The assumption we make about the error term μi determines the kind of panel model
we should estimate. The characteristics of the coefficient estimates for each of the models
would be important determinant in the ultimate choice of the model. In the current
study, we are less concerned about the magnitude of coefficient estimates and more with
their sign and significance. As such we estimate several models and report the results.
Table 3 reports the estimation results for the continuous variable GLB.
According to the results in Table 3, we note that the random effects model performs
relatively better with a higher explanatory power. In all three specifications, M3

Table 3. Estimation results- continuous dependent variable GLB.

Model
Independent Variable Pooled OLS Fixed Effects Random Effects
Constant -*** -* -***
M3 +*** +*** +***
Interest Rate - + +
APP + + +
CO2 +*** + +***
Model Tests and Significance Overall R2 =.1381 Overall R2 =.1189 Overall R2 = 0.1369
F = 14.17 F = 25.38 Wald Chi2 = 27.86
P = 0.000 P = 0.000 P = 0.000
*** Significance at 1%;* Significance at 10%
 JOURNAL OF ECONOMIC POLICY REFORM 11

Table 4. Estimation results- binary dependent variable GLB Dummy.

Model
Independent Variable OLS Logit Probit
Constant -*** -*** -***
M3 +*** +*** +***
Interest Rate - -** -**
APP + + +
CO2 +*** +*** +***
Model Test and Significance Overall R2 =.31428 Pseudo R2 =.3139 Pseudo R2 = 0.3203
F = 68.35 Wald Chi2 = 178.82 Wald Chi2 = 213.47
P = 0.000 p- 0.000 P = 0.0000
*** Significance at 1%; ** Significance at 5%;

maintains a positive and a highly significant coefficient estimates, indicating that an

increase in M3 is positively related to the total volume of green labelled bonds, holding
other variables constant. Moreover, the atmospheric level of CO2 is also positively and
significantly related to the total volume of green labelled bonds in two out of the three
specifications. All other variables are insignificant.
Table 4 reports the estimation results for the binary variable GLB Dummy. Here we
note a higher explanatory power as reflected in the value of the Pseudo R2. The sign and
significance of the coefficient estimates are indicative of the direction of the change in the
probability of green bond issuance. Higher values of M3 and atmospheric CO2 are
significantly positively related to increased probability of observing issuance of green
labelled bonds. Whereas, increases in the long term interest rate dampen the probability.
While we do not claim to have a firm theoretical reason to prefer one model over
another, we believe that one of the binary models either logit or probit tells the story of
the relation better than the continuous variable models.

V. Concluding remarks
The paper recommends a synergy between monetary and environmental policies in the
EU and the Eurozone, specifically, in the design of the non-conventional policy instru­
ments that inject liquidity in the market. Thus, it examines whether the ECB’s policy of
QE could potentially promote the production and use of renewable energy sources and
significantly support EU’s continuous effort to protect the environment in the pursuit of
the 2030 climate and energy goals.
In order to address the issue, the paper posited a model that examined the impact of
QE on environmental variables using monthly data from Climate Bonds Initiative for the
period 2013–2018, in an attempt to explain the variation in the amount of “green labelled
bonds” issued in the individual member countries of the Eurozone. The measure of
liquidity we used (M3) maintained a positive and a highly significant coefficient estimate
in all specifications of the model, indicating that an increase in M3 through QE is
positively related to the total volume of green labelled bonds, holding other variables
constant. The asset-purchase variables included in our models were not significant. A
finding that could be explained by the fact that the asset purchase amounts initially affect
the monetary base with no credit impact. Once they multiply in the economy causing an
increase in M3, the impact would be felt. This is in line with results in other studies
showing that though QE affects high powered money immediately, the impact on the
12 N. HILMI ET AL.

economy depends on the effect of unconventional policy on broad money supply.

Moreover, the interest rates were also not significant during the period of the study,
noting that the QE policies started after reducing rates to extremely low levels. It could be
that interest rates effects were felt gradually before the beginning of QE as was the case in
many studies in the literature.
The ECB has decided to continue injecting liquidity through the APP for the foresee­
able future by adding a temporary envelope of additional net asset purchases of €120
billion until the end of 2020, in order to reinforce its primary policy objectives of price
stability and achieving interest rate targets. Though the amounts of purchases were not
equal over time and have been adjusted regularly based on the path of inflation in the
Eurozone, it is evident that there is a continuous commitment to QE as reflected in the
statements of the ECB and the size of the purchases of eventually larger amounts in 2020
than in 2019.
The findings of this paper suggest that there seems to exist a direct credit channel
between quantitative easing and lending activity as measured by environmental loans.
This reinforces the notion that a systematic and coherent synergy between monetary
and environmental policies may lead to a more efficient use of resources that is crucial
to the transition towards a low carbon economy. The QE policies then allow us to
recommend complementary strategies that would also show the commitments of the
EU to the Paris Agreement and self-imposed targets of transition to the green econ­
omy. Further research on the relationship between monetary policy and climate change
in light of the latest pandemic of COVID-19 is also recommended and ought to be
pursued.

Disclosure statement
No potential conflict of interest was reported by the authors.

Funding
This work was supported by the Centre Scientifique de Monaco; Lebanese American University.

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