Fossil-Fuel exporters must rethink monetary policy

One would imagine a topic like monetary policy to be classified under Economics and Finance in Project Syndicate.But this piece on monetary policy is classified under Sustainability!

Rabah Arzeki (Chief Economist of the World Bank’s MENA Region) argues that fossil fuel exporters should rethink mon pol:

Although many fossil-fuel exporters have recognized the need to diversify their economies, very few have succeeded. But the regulatory and technological changes now sweeping the global energy market may make the need for such a transition more urgent. Central banks should therefore work on the longer end of the yield curve to facilitate longer-term investment and economic diversification.

In addition, central banks’ response to the risk of stranded assets may influence how fossil-fuel exporters invest their wealth. Many oil exporters have accumulated vast financial assets. These countries’ strategic allocation of such assets is all the more important given the mounting risks to their main source of wealth. By looking beyond the business-cycle horizon, central banks can play a critical role in facilitating these countries’ investments in non-fossil-fuel assets.

In the face of the challenge posed by climate change, the focus of monetary policy often seems very short term. Central bankers must break this “curse of horizons” and take decisive steps to address fossil-fuel-related risks. They need to reflect on and communicate the existential threat of stranded reserves and capital, advocate the adoption of appropriate structural policies, pursue a suitable interest-rate policy, and provide supportive financial policies to encourage both economic diversification and changes in strategic asset allocation. Combating climate change while maintaining global financial stability requires nothing less.

I had posted about Australia which is a coal exporter and needs to rejig its strategy as well..

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