olaf sleijpen : when economists agree - the role of central banks in the green transition speech by mr olaf sleijpen, executive board member of monetary affairs and financial stability of the netherlands bank, at the green finance symposium at tilburg university, tilburg, 21 november 2024. * * * thank you. and congratulations, asli, on your honorary doctorate. given your impressive track record of academic and policy contributions, i think this is very well deserved. and i feel honoured to speak here today at this symposium. if i had to pick one thing from your work, and there is many to pick from, it would be that strong, stable and inclusive institutions are a precondition for financial and economic development. strong institutions are also a precondition for the green transition. and central banks are one such institution. let me put this into context. climate change and nature degradation pose risks to monetary and financial stability. we all know the examples. we may see asset and collateral depreciation because of flooding, or investments in polluting industries becoming stranded assets. we may see an increase in the price of agricultural commodities due to more frequent droughts. and we have all seen that the impact of the energy mix and energy policies on the general price level can be extremely strong. whether the transition will be orderly or not, central banks and financial supervisors have a role to play. because climate change and nature degradation will have an impact, one way or the other. if we do not succeed in putting a stop to it, it will increase the cost of adaptation and will pose serious risks to the economy. but policies that mitigate climate risk also come at a cost in the short term. a cost that may impact the economy, financial institutions and financial stability. having said that, the long - term cost of dealing with the consequences of climate change, if we do nothing or too little, far outweighs the short - term cost of an orderly and timely transition. central banks and financial supervisors, having a long - term view, will therefore always prefer a predictable and orderly transition path. shaping that transition, and accelerating it, is a responsibility we all share. each in our different roles. governments for instance have the democratic mandate and the position to lay down a long - term vision and strategy, to set goals, and to design and implement policies. they also have the economically most effective and efficient tools at their disposal. here i think of setting standards and imposing regulation,

elements can have catastrophic consequences and to act upon this recognition. why did monetary policy not lean against the wind? in the past, i have stated that “ many of the risks that crystallised in the past year were on our radar screen long before the crisis started ”. 1 at the same time, i argued that these risk nout wellink ( 2008 ) “ it ’ s the incentive, stupid! ” speech at the conference on “ integrating micro and macroeconomic perspectives on financial stability ”, university of groningen, 26 may 2008. assessments were not translated into an efficacious preventive action – at least not by monetary authorities. but why did we not lean against the wind? i believe that this happened for five main reasons. 1. first, there was an inability – by both academic researchers and analysts in the policymaking world – to pay sufficient attention to the role of stocks. in 2007, high levels of debt had resulted from a prolonged period of strong credit growth and excessive risk - taking. these made the economy vulnerable to negative shocks, such as the collapse of the us subprime mortgage market. the importance of the stock of debt in the lead - up to the crisis is a manifestation of a more general phenomenon, whereby in a context of disequilibrium – such as the accumulation of financial imbalances – stocks dominate flows as determinants of macroeconomic dynamics. this phenomenon cannot be captured in standard macroeconomic models based on linear relationships. in tranquil times, the relevance of stocks is modest, and flows as well as prices of flows matter. under these circumstances, policy is about fine tuning – mostly through the anchoring of expectations. however, “ ordinary ” monetary policy that is based on flows ( monetary flows ) and prices ( inflation ) cannot deal with the implications of stocks that are typical of periods in which massive financial imbalances can accumulate. we now know that looking after stocks is necessary during good times as a means to prevent financial crises. 2. second, macroeconomics and policymaking have focused on decision - making in conditions of measurable risk, rather than immeasurable risk or what is known as knightian uncertainty. the concept of measurable risk may be appropriate during “ normal ” times. but when we face a build - up of massive financial imbalances, it is impossible to measure risks correctly because, like keynes said, “ we simply do not know ” the future. the crisis has taught us that there are always