Role of Bank Lending in Financing Green Projects


This chapter develops an environmental dynamic stochastic general equilibrium (E-DSGE) model with heterogeneous production sectors. In particular, the model speci!es for the inclusion of low-carbon emissions !rms that !nance their investments and production only through banking loans, and high-carbon emis- sions !rms that !nance their investments either with bank loans or by issuing equities. Moreover, governments impose intensity targets to reduce pollution and allow high-carbon emissions !rms to buy permits to allow their production. The model studies the transmission mechanism of technology, monetary, and !nancial shocks and !nds that only a positive !nancial shock to green !rms can boost production and credit. Financial shocks can be interpreted as those that affect the borrowing capacity of !rms by tightening or relaxing the enforcement of collat- eral constraints. By contrast, a positive technology shock and easier monetary policy lead only to a short output on impact; over the longer term, green !rms experience losses. The chapter analyzes the impact of several macroprudential policies and !nds that only differentiated capital requirements can sustain green !nancing.