Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/330307 
Year of Publication: 
2025
Series/Report no.: 
Deutsche Bundesbank Discussion Paper No. 28/2025
Publisher: 
Deutsche Bundesbank, Frankfurt a. M.
Abstract: 
We propose a quantitative DSGE model with environmental and financial frictions to asses how high emission taxes affect optimal central bank collateral policy. Central banks specify which assets banks can pledge as collateral to obtain short-term central bank funding. This is referred to as central bank collateral policy and involves a trade-off between supplying sufficient liquidity to banks and exposing itself to losses from accepting risky assets as collat- eral. Emission taxes affect this trade-off by reducing productivity in the non-financial sector, such that the corporate default rate increases and the quality of collateral deteriorates. High emission taxes also reduce investment, debt issuance and, hence, the amount of collateral available to banks. This decline in the quantity of collateral is more pronounced if emission tax shocks are very persistent or permanent. It is therefore optimal to relax collateral policy in the longer run, where the collateral quantity channel dominates, and to tighten collateral policy after a transitory emission tax shock, in order to offset the short run reduction in collateral quality.
Subjects: 
Central Bank Collateral Policy
Climate Policy
Collateral Premia
Corporate Default Risk
JEL: 
E44
E58
E63
Q58
ISBN: 
978-3-98848-049-1
Document Type: 
Working Paper

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