our monetary policy portfolios? how should central banks respond to calls on our social responsibility in the face of a potential twin failure – a market and a political failure? nobel laureate jean tirole reminds us that “ our moral duty is to eliminate coal, not to pretend we do ”. he notes : “ [ divestment ] has little impact if other investors jump at the opportunity of undervalued fossil fuel stocks and bonds [ … ]. it also has no impact if the plants already exist, as they do not need ﬁnancing. in such cases only a carbon price will have an impact on emissions. ” indeed, studies suggest that the eurosystem ’ s corporate bond purchases have compressed yield spreads not only for those bonds purchased or targeted, but also for non - eligible bonds. [ 15 ] such an indirect impact can be due to the portfolio rebalancing channel, as our purchases may push investors into riskier asset classes. thus, even those “ green ” bonds that are not eligible might have beneﬁtted from our purchases to some degree. at the same time, the impact of potentially excluding carbon - intensive ﬁrms from our portfolio should not be overestimated. monetary policy cannot be a substitute for putting the right price tag on carbon emissions. and i am very critical of suggestions that monetary policy should be used to actively pursue climate policy goals. let me highlight three reasons. first, conﬂicts with our primary objective of price stability may arise. indeed, it would be short - sighted to assume that inﬂation will hover at very low levels forever. [ 16 ] when necessary in order to maintain price stability, the eurosystem needs to apply the brakes and scale back its asset purchases or portfolio. but the need to promote the transition of the economy would not simply vanish. second, it is not the task of the eurosystem to penalise or subsidise certain industries. correcting market distortions often has intricate distributional implications. such decisions need strong democratic legitimacy and are a matter for governments and parliaments. they have the right tools at their disposal and, as elected representatives, they also have the democratic authority to use those tools. at the same time, they have to weigh the ﬁght against climate change against other policy goals. third, central banks should beware of mission creep. to quote jean tirole once more : “ we must resist this trend of governmental agencies becoming jacks of all trades

18 and that other providers of credit would not be “ free riders ” gaining new customers even as they practiced restraint. finally, and closely related, prudential policies to reduce “ excesses ” in the financial system would have to be quite comprehensive, or else the demand for credit would simply shift to unregulated sectors and new sources of such credit would arise. indeed, a large and growing proportion of credit is already provided directly through markets rather than regulated financial institutions. considerations such as these imply that the use of monetary policy might also have to be contemplated19 if imbalances in the financial system are to be effectively constrained. unfortunately, along with the general impediments against the use of policy for macroprudential purposes, other considerations militate against the specific use of monetary policy. the first of these is that monetary policy is generally committed to the objective of domestic price stability, whether in the context of a formal “ inflation targeting framework ” or not. if rates must be raised for macroprudential reasons when inflation is under control, then the inflation target may be undershot. some worry that this could undermine the credibility of the whole regime. at the very least, there is an inconsistency that will need to be publicly and convincingly explained. moreover, in a world of liberalised capital flows, there is the problem that higher interest rates might serve to draw in foreign capital in significant ways. a stronger exchange rate might lower domestic prices and increase the undershoot of the target inflation rate. conversely, actions taken to prevent the exchange rate from rising ( intervention ) might conceivably result in an increase in domestic liquidity that would fuel imbalances rather than moderate them. finally, it may prove ( indeed has proved ) difficult to get policymakers to focus on the simultaneous occurrence of a number of developments as the only reliable indicator that imbalances are building up. rather, there has been a tendency to suggest that the macroprudential approach comes down to “ targeting asset prices ”, and various well known objections can be raised to this. which of many asset prices should be targeted? what should be the targeted level? would interest rates high enough to “ burst the asset price bubble ” not cause enormous damage elsewhere in the economy? this narrow focus on asset prices as the core of the problem will have to be replaced by a broader conceptual framework if anything practical is to be done about macroprudential concerns using monetary policy. 4. can