How Fiscal and Monetary Policies Support a Green and Low-Carbon Transition: Based on the Stock-Flow Consistent Model

Abstract

Promoting a green and low-carbon transition in the economy and achieving Chinese “dual carbon” goals require precise support from fiscal and monetary policies. This paper constructs a seven-sector stock-flow consistent model that includes heterogeneous household sectors and heterogeneous capital goods production sectors. It conducts a simulation analysis of the impact of fiscal and monetary policy tools, including green bonds and differentiated green loan interest rate pricing, on China’s “dual carbon” goals, economic growth, and other key economic indicators from 2020 to 2060. The findings reveal that fiscal policy plays a fundamental role in addressing the negative externalities of green and low-carbon transition, while monetary policy provides critical support for the gradual replacement of brown assets by green assets. Compared to the baseline scenario or reliance on fiscal policy alone, the combined efforts of fiscal and monetary policies yield more effective outcomes for green and low-carbon transition objectives. Moving forward, it is essential to optimize the coordination between fiscal and monetary policies, continuously enhance their efficacy in supporting the green and low-carbon transition, and remain vigilant about inflation and economic growth fluctuations during this transition.

Keywords

fiscal policy / monetary policy / green and low-carbon transition / stock-flow consistent (SFC) model

RIGHTS & PERMISSIONS

Higher Education Press