Climate Change: Avoiding the ‘Do I Feel Lucky?’ school of policymaking and Dornbusch/Hemingway hypothesis

Gabriel Makhlouf, Governor of Central Bank of Ireland in this speech says we need to move ahead on climate change. We need to avoid the ‘Do I Feel Lucky?’ school of policymaking and Dornbusch/Hemingway hypothesis.

I want to start by reminding us all of what Ernest Hemingway wrote, when one of the characters in his novel The Sun Also Rises was asked how he became bankrupt. Two ways was the reply, gradually and then suddenly. In a similar vein, Rudiger Dornbusch, a well-known economist, said, when talking about Mexico’s currency crisis in the mid-1990s, that “the crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought”. On the face of it, that probably applies to most financial crises and not just currency ones. And perhaps it has application elsewhere.

On the face of it, that probably applies to most financial crises and not just currency ones. And perhaps it has application elsewhere.
I will return to Hemingway and Dornbusch later. When it comes to climate change, there has been considerable debate about the role of central banks. Questions have been asked about whether actions on climate change would interfere with their legal mandate, or indeed if central banks would be reaching into areas that should only be addressed by democratically elected officials.

In my view, a broad consensus has now been reached: climate change is affecting the capacity of central banks to meet their core and secondary mandates, be that price and financial stability, or in some cases also supporting broader economic policies. So central banks have to play a role in tackling the climate challenge, along with all actors in society, but the time for that action is running out.

Just two weeks ago the latest warning came in the form of a report from the world meteorological organisation (WMO, 2021 link). Everyone in this room will be familiar with that report, indeed you have no doubt discussed it already over the course of this retreat. The report is stark in its findings: key climate change indicators – greenhouse gas concentrations, sea level rise, ocean heat and ocean acidication – all set new records in 2021. We are also getting measurably closer to temperatures reaching 1.5oC in the coming years. To put it quite simply, the world is off course.

He then reviews what central banks can do to mitigate climate change concerns.

In the end, he refers to ‘do I feel lucky’ hypothesis from Dirty Harry series.

In my view, the evidence was and is clear. As I said in a blog last year, “the case for action has been made. We don’t need to reestablish it and we shouldn’t let the next generation rediscover it”. We need to take action to address the risks and we should not wait to test and prove the Hemingway/Dornbusch hypothesis. Central banks do not believe in the “do I feel lucky?” school of policymaking, waiting and hoping for the best. We are acting and will continue to act.

 

Advertisement

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.


%d bloggers like this: