How can the European Central Bank (ECB) support a sustainable recovery? In a report for Positive Money Europe and Sustainable Finance Lab, Jens van ‘t Klooster and Rens van Tilburg propose that the ECB starts a Green TLTRO program.

Green TLTRO is a refinancing program for commercial banks. Banks can fund their green loans with longer term (several years) deposits from the European Central Bank (ECB). Green loans are bank loans that comply with the EU’s Green Taxonomy.

The figure below shows the balance sheet of a commercial bank with conventional (left) and green (right) TLTRO. Under TLTRO-III, the ECB funds 50% of a bank’s eligible assets. Under green TLTRO, the ECB funding is only available for green bank loans.

The interest rate on the Green TLTRO is determined by the volume of green bank loans. More green loans result in a lower interest rate on the funding from the ECB. With negative interest rates, banks have to pay back less to the ECB than they borrowed. This provides a strong incentive to banks to increase their lending to green projects, and to pass on the low rates to borrowers.

Is Green TLTRO a pie in the sky proposal? Only if you’re not keeping up with the times.

TLTROs are a well-established monetary policy tool. The ECB is currently doing TLTRO-III.

In a recent speech, ECB Executive Board Member Isabel Schnabel pointed out that climate change is a market failure. She said that collective action, including by the ECB, should correct this market failure and accelerate the transition towards a carbon-neutral economy.

Asked about the Green TLTRO report by MEP Bas Eickhout, ECB President Lagarde said that “climate change has to be part and parcel of our strategy review. Not because it is a secondary objective, but because of its impact on price stability, because of its significant impact on risk assessment and risk management. And the Green TLTRO, as you called it, is a matter that is of interest and that we will look at.”

What volume of green loans should the ECB target during the first 3 years? How low should the interest rate on Green TLTRO be? Should the eligible bank assets include loans to households for house purchases, a category that is currently exluded from TLTRO?

In a webinar on 12 October 2020, Jens van ‘t Klooster discusses the Green TLTRO proposal with Isabel Vansteenkiste (ECB) and Frederik Ducrozet (Pictet).

Update 2020/10/18: this is the video

Full disclosure: I have done consulting work for this report.

Thinking past the sale of your financial panacea

There are plenty of financial proposals for dealing with the corona crisis.

More government debt! Eurobonds! Helicopter money! Eliminate sovereign debt held by the ECB! Create a European investment fund!

One thing that greatly annoys me is that people don’t go into the details.

So if you want to convince me of your financial panacea, show me what it means in practice. Who are the winners and losers? What are the consequences of your plan for households, companies, banks, government finances, inflation, employment?

Make me think past the sale, and I might buy your proposal!

The economics of the coronavirus on Twitter

Larry Summers is a VSCO girl. On central banks, fiscal stimulus, and why you should read Eric Lonergan

In case you’re not familiar with teen culture, VSCO girl is a fashion trend.

Surely, the Very Serious People who think about central banks are not susceptible to such fads, right?

I regret to inform you that the Very Serious economists and central bankers are just as prone to trends as teens on TikTok.

Continue reading “Larry Summers is a VSCO girl. On central banks, fiscal stimulus, and why you should read Eric Lonergan”

The Owl of Frankfurt: Paris, 2076

Eulogy by Aya Sissoko, President of the ECB, 8 January 2076

It is with great sadness that we say farewell to our honorary President and dear friend Christine Lagarde today.

Madame Lagarde will be fondly remembered as the fourth President of the European Central Bank, the predecessor of the Euro Central Bank.

Christine became President during a protracted malaise in the euro area. By throwing off the yoke of false dogma, she revitalized the ECB. Her curiosity, vision and political prowess changed the course of history.

Owl of Athens on Charon’s piece

Under her leadership, the ECB showed the world how to handle the climate transition. At the same time, the euro economy grew at a rate previously believed to be impossible.

Ask any of the Seven Bankers, and they will all agree: Christine was the first modern central banker. Her autobiography, published 30 years ago, is still a must-read.

Christine’s career set the gold standard for our profession. Not just for what she did during her presidency, but also for what she didn’t do.

Her resignation in the wake of the Crisis of 2033 was a clear statement against the all-powerful central banker. During her retirement, Christine refrained from commenting on current events.

Christine, Madame Lagarde, you were born Lallouette – the lark – but you will always be The Owl of Frankfurt.

On behalf of the 1.4 billion people who use the euro every day,

Bon voyage!


Next episode: Lagarde discovers her powers

Central banks will always be political

What do crypto enthousiasts have in common with defenders of independent central banks?

Based on the “Buy Bitcoin”-replies to ECB/Fed tweets, it seems the answer is “not much”.

However, that’s incorrect. Both groups think that their projects are apolitical.

Many central bankers view themselves as technocrats, divorced from politics.

But that’s a fantasy.

You see, anything a central bank does – even within its mandate – has political consequences.

Should monetary policy take into account climate change?

Should the central bank change interest rates or do QE to reach its inflation goal? Whatever option is chosen, monetary policy has distributional effects. For example, the German government has saved hundreds of billions in interest costs.

European non-financial corporations have benefited from low interest rates. Source

These two dilemmas illustrate that central banking is inherently political.

Therefore, economists should calculate the consequences of different monetary policy options. These scenarios will make the politics of the central bank’s actions explicit. For example, I estimated the effect of deeply negative interest rates (a proposal of Miles Kimball) on banks, governments, the ECB and the private sector.

Especially in the euro area, the ECB should take differences in asset mixes between countries into account.

Increased transparency will enable central bankers to defend monetary policy against criticism.

Update 26 January 2020: my arguments are obviously not new, see for example:

The Weimar hyperinflation revisited

In a 2017 blog post, I wondered why Germans remember the hyperinflation of the Weimar Republic era.

Nils Redeker, Lukas Haffert and Tobias Rommel have recently published a paper about this very question. In Misremembering Weimar: unpacking the historic roots of Germany’s monetary policy discourse, they show that

most Germans do not know that Germany’s interwar period was shaped by two separate crises, but rather see them as being one and the same.


Looking back into a skewed version of their own history, many Germans conclude that mass unemployment and high inflation are just two sides of the same coin. What makes this worse is that this misconception is especially prevalent among well-educated and politically interested Germans. Hence, the group of people following the ECB’s monetary policy most closely is also the group most likely to draw the wrong lessons from German history. But public thinking about Weimar economic history is not just substantially flawed. We can also show that the skewed memory of the Weimar Republic still affects the way in which at least some Germans think about monetary policy today.

Update 15/02/2020: The following comment on a FT Alphaville article about German financial assets corroborates Redeker et al‘s thesis:

The commenter is probably well-educated, or he wouldn’t read Alphaville. But he makes two mistakes. First of all, the hyperinflation did not occur in the 1930s. Secondly, there is a logical inconsistency. If Germans fear hyperinflation, why do they hold 40% of their assets in currency and deposits? That doesn’t make any sense, as a new hyperinflation would make these assets worthless.

Actually, lobbyists are good

Lobbyists are often mistrusted. Special interest groups use them to influence politicians.

However, what’s the alternative? Policy makers cannot know everything. They need input from industry and non-profit groups. Through personal contacts with officials and by publishing articles, lobbyists can get new ideas on the agenda.

Take the responsibility of central banks in the green transition to phase out carbon-based fuels.

European Central Bank (ECB) board member Benoit Cœuré recently declared that the ECB should actively support the transition to a low carbon economy. Continue reading “Actually, lobbyists are good”