Today, I discuss a recent paper from the Bank of Japan’s Research and Studies series, which focuses on the extent to which central banks around the world are concerned about climate change and sustainability, and how they interpret these challenges within their policy frameworks. The interesting result is that when central banks are explicitly mandated to consider these issues, the policy response is framed very differently and is solution-oriented, whereas otherwise the policy narrative is all about how climate change will affect inflation. In the latter case, central banks do not see their role as part of the solution. Instead, they threaten tougher monetary policy to combat inflation. I also considered the latest US inflation data. Finally, sharing some of the live music I enjoyed in Kyoto this year.
Central banks and climate change
On September 29, 2023, the Bank of Japan published a paper in its Research and Research series— Central bank directives and communications on climate change: Evidence from a large dataset of central bank speeches – Analyze the language used by central bankers in speeches to assess the extent to which they are concerned about climate change when articulating their policy stance.
I am very interested in language use and how changing patterns of word use can be used to detect institutional characteristics.
Currently, I have a very large data set extracted from the annual reports of the International Monetary Fund from its inception, which we will analyze using techniques from the fields of cognitive linguistics and stylistics (this is in collaboration with Dr. Louisa Connors a project for which he holds a PhD in this field of research).
Therefore, I was very interested in the approach taken in the Bank of Japan research paper (co-authored with U.S. Federal Reserve officials).
Their aim was to analyze speeches by central bank officials to “empirically test the role of the directive in shaping central bank communications on climate change” and to assess differences between banks regarding the importance of the SDGs to those banks. Wider government policy”.
The focus is on the mandate given by the government to the central bank, and the summary results are:
…Mission considerations play an important role in shaping central bank communications on climate change.
The authors note that “climate-related risks spread through the financial system” and it is unclear what role, if any, central banks will play in addressing this risk.
To make progress, researchers analyzed 18,264 speeches by 108 central bank officials between 1997 and 2022.
Most banks are from developed countries.
They tried four different style techniques:
1. Manual selection from the BIS database – where “Climate Change”, “Green Finance” and “Sustainability” are the categories of publications.
2. Simple dictionary method – match “climate change” in your speech.
3. Supervisory word scoring method – score situations that include or do not include “climate change”. The dictionary is made up of various other climate-related words, such as “green transition”, “green finance”, “carbon emissions”, “Paris Agreement” and “green bonds”.
4. Unsupervised word embedding method – complex.
The last three technologies are – natural language processing – Tools, among which:
…involves using rule-based or probabilistic (i.e. statistical and more recently neural network-based) machine learning methods to process natural language data sets, such as text corpora or speech corpora. The goal is a computer that can “understand” the contents of a file, including the contextual nuances of the language within it. The technology can then extract exactly the information and insights contained in the documents, as well as classify and organize the documents themselves.
They found that the single-word scoring method worked best for speech recognition.
A previous study of 135 central banks found that “more than half include sustainable growth or development objectives in their operations… to support broader government policy priorities”.
The question they seek to answer is whether climate action is explicit in central bank policy decisions, or whether it is exempted in general terms under so-called “price stability and financial stability” goals, which are always the subject of legislative mandates.
They found that technology 3. was the best in terms of comprehensiveness, while the other technologies lacked what they considered key documentation.
They also noted that between 2012 and 2022, central bank officials increasingly gave “climate-related” speeches.
This diagram (their Figure 2) shows the evolution.
This collection of word clouds shows the evolution of language used in central bank speeches between 2014 and 2022.
The transitions from the global financial crisis to Brexit to climate change and pandemics have been dramatic.
They then divided “climate-related” speeches into two categories:
1. Have clear goals to support sustainable development.
2. Those who have only implicit goals to support government policies, “which may include sustainable goals.”
They also assigned each speech a “task similarity metric,” which is “the degree to which the content of a particular climate-related speech is relevant to each of the three goals.”
The three goals are price stability, financial stability and sustainable development.
Central banks in developed countries emphasize “price stability” more frequently, while banks in emerging countries focus more on sustainable development.
The former talks more about climate change in the context of “the impact of climate change on inflation”, while the latter focuses on the “finance” of transition.
They also found that when central banks have a clear legislative mandate to incorporate sustainability into their decision-making, the resulting speeches are more likely to focus on actually solving climate problems.
However, when there are no mandates, discussions tend to focus on how climate change affects price stability, rather than reflecting a commitment to tackling the carbon transition.
As a result, most developed country central banks remain obsessed with “price stability” and explain everything within this lens, thus avoiding becoming a progressive voice in the debate about how policymakers should respond to the green transition.
The argument a Modern Monetary Theory (MMT) economist would make is this.
Government central banks have a vital role to play as governments try to transition away from carbon emissions quickly and in an efficient and fair way.
While much of the transition is the work of engineers dealing with the new technologies and sociologists and psychologists dealing with the resulting disruption of communities and the changes required, the government's economic policy arms – the Treasury and the Central Bank – are ensuring plays an important role in transformation. The process will not be plagued by irrelevant questions such as “How will we pay for it?”
Central banks should make it clear that they can put whatever numbers are necessary into their bank accounts to ensure resources are allocated to the transition and not to carbon-intensive industries.
Treasury should assess the appropriate scale and pace of transition to ensure that productive resources can be shifted and/or reskilled (in terms of manpower) to avoid significant (inflationary) bottlenecks.
None of the speeches analyzed in the papers discussed here consider these issues.
there's still a long way to go.
US inflation
The U.S. Bureau of Labor Statistics released— Consumer Price Index Summary – Yesterday’s November inflation data showed that inflation grew only 0.1% that month and only 3.1% over the past 12 months.
In essence, supply-side problems are easing rapidly and have little to do with the impact of “excessive spending.”
In 2021, I argued that this was a brief inflationary episode driven by the extraordinary disruption caused by the pandemic, exacerbated by the situation in Ukraine and OPEC's greed.
I think the data confirms this assessment, which means the BOJ got it right (and other central banks got it seriously wrong).
The chart compares the events of the 1970s to the current event, which was triggered and prolonged by two OPEC oil price increases.
I drew a plot from the 1970s to show how long it would take for inflation to get back to where it started.
The current wave peaked earlier, well below the first wave in the 1970s, and dissipated faster.
Upcoming events
I haven’t been to Europe since the COVID-19 outbreak in early 2020.
I was in Rome at the time, and the Italian government had cordoned off areas near Milan in response to an unknown threat.
I was lucky enough to get home one day before the Australian government closed the border to all incoming people, including Australian citizens.
I will be returning in January and February 2024, and I look forward to meeting friends and colleagues in person again rather than via Zoom.
I will be speaking at three known public events at this stage.
1. Friday 27th January 2024 – Central London – GIMMS event at The United Alliance (Diskus Theatre), 128 Theobalds Road, London, UK – Daytime. I will provide more details including ticketing as I learn more.
2. Saturday 28 January 2024 – London – British Workers Party event. More details will be announced soon.
3. Thursday 1 February 2024 – Helsinki – Public lecture/debate hosted by the University of Helsinki. I will also be teaching at the university as usual during the two weeks from January 23rd to February 1st.
More details will be announced soon. You will be able to watch the first week lectures via Zoom (I will be doing it in the UK), if you are in Helsinki for the second week you are welcome to attend face-to-face classes, where I expect all students to wear masks to protect me and the class of other people.
So I'd like to see people who are able to attend any or all of these events within a month or so.
Music – Live performance from Shide, Kyoto
On October 31, 2023, I spent a rock night at the famous “live house” Jittoku with some of Kyoto’s top musicians.
We chose some popular songs that didn’t require rehearsal.
The place was packed and although the iPhone recording wasn't that hot, you could get a feel for what the night felt like.
Those were three of the 8 or 9 songs we played together.
It was fun and I will join them again next year.
Cocaine – JJ Cale
Imagine this – John Lennon
Sweet Home Chicago – Robert Johnson
That's enough for today!
(c) Copyright 2023 William Mitchell. all rights reserved.
