Don’t Lead Me This Way: Central Bank Guidance in the Age of Climate Change

Published on 18 December 2023

By Pauline Cizmic , Anna Creti and Marc Joëts.

This paper delivers a two-pronged analysis: first, it harnesses topic modeling to unravel the European Central Bank (ECB)’s climate change dialogue from 1997 to 2021, revealing a sharp focus on climate risk from 2013, peaking in 2018 onward. Second, it connects the dots between this heightened ECB rhetoric and the default probabilities for North American firms, as mirrored in CDS spread returns. A quantile regression analysis reveals a compelling dynamic: in the short run, ECB climate talk tempers default risks, fades in the medium run, but significantly drives up long-term risk. Our results, robust across various event studies, spotlight the power of central bank communication in steering market dynamics and flag industries poised for a green transition.

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