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HomePaperUnintended Environmental Cost of Monetary Tightening: The Federal Reserve and Pollution

Unintended Environmental Cost of Monetary Tightening: The Federal Reserve and Pollution

10 June 2025
Authors: Qichao Wang
Presenter: Qichao Wang
Abstract:

I study the environmental impacts of the US monetary policy shock using air pollution records from satellite images. An unexpected tightening reduces output but increases air pollution. The puzzle is explained by a clean investment channel: An increase in firm financing costs hinders clean investment and subsequently increases pollution. The channel has emerged since the global financial crisis. Consistently, the pollution increase after a tightening coincides with the decreasing renewable energy ratio, and is stronger for cleaner firms and states. Regarding environmental amenities in consumer welfare, the optimal monetary policy should coordinate with fiscal policy to control inflation with a moderate environmental impact.

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