The academic and policy debate regarding the role of central banks and financial regulators in addressing climate-related financial risks has rapidly expanded in recent years. This Perspective presents the key controversies and discusses potential research and policy avenues for the future. Developing a comprehensive analytical framework to assess the potential impact of climate change and the low-carbon transition on financial stability seems to be the first crucial challenge. These enhanced risk measures could then be incorporated in setting financial regulations and implementing the policies of central banks.

This paper develops a stock-flow-fund ecological macroeconomic model that combines the stock-flow consistent approach of Godley and Lavoie with the flow-fund model of Georgescu-Roegen. The model has the following key features. First, monetary and physical stocks and flows are explicitly formalised taking into account the accounting principles and the laws of thermodynamics. Second, Georgescu-Roegen's distinction between stock-flow and fund-service resources is adopted. Third, output is demand-determined but supply constraints might arise either due to environmental damages or due to the exhaustion of natural resources. Fourth, climate change influences directly the components of aggregate demand. Fifth, finance affects macroeconomic activity and the materialisation of investment plans that determine ecological efficiency. The model is calibrated using global data. Simulations are conducted to investigate the trajectories of key environmental, macroeconomic and financial variables under (i) different assumptions about the sensitivity of economic activity to the leverage ratio of firms and (ii) different types of green finance policies

This paper develops a benchmark stock-flow consistent model that links functional with personal income distribution. The model consists of various household groups that receive income from different sources or from the same sources in different proportions. The dynamic linkage between functional and personal income distribution is formulated as part of a complete macroeconomic system. Inequality decomposition techniques are employed to associate income sources with personal income distribution. Simulation exercises are conducted to reveal the various ways through which functional and personal income distribution interact. In the simulations, a rise in the exogenous component of low-skilled workers’ wage share reduces inequality in the short run; in the medium to long run inequality starts increasing due to certain macroeconomic developments, but remains lower than its initial level in almost all cases. A change in functional income distribution due to a rise in the dividend payout ratio of firms increases inequality both in the short run and the long run.

Wynne Godley and Hyman Minsky were two macroeconomists who ‘saw the crisis coming’. This paper develops a simple macrodynamic model that synthesises some key perspectives of their analytical frameworks. The model incorporates Godley’s financial balances approach and postulates that private sector’s propensity to spend is driven by a stock-flow norm (the target net private debt-to-income ratio) that changes endogenously via a Minsky mechanism. It also includes two fiscal rules: a Maastricht-type fiscal rule, according to which the fiscal authorities adjust the government expenditures based on a target net government debt ratio; and a Godley–Minsky fiscal rule, which links government expenditures with private indebtedness following a counter-cyclical logic. The analysis shows that (i) the interaction between the propensity to spend and net private indebtedness can generate cycles and instability; (ii) instability is more likely when the propensity to spend responds strongly to deviations from the stock-flow norm and when the expectations that determine the stock-flow norm are highly sensitive to the economic cycle; (iii) the Maastricht-type fiscal rule is destabilising while the Godley–Minsky fiscal rule is stabilising; and (iv) the paradox of debt can apply both to the private sector and the government sector.

This paper develops a stock-flow consistent model that explicitly integrates the role of liquidity preference and perceived uncertainty into the decision-making process of households, firms, and co...