Green Central Banking Policies and Institutional Credibility: Evidence from Emerging Economies

Abstract

This study investigates the relationship between green central banking policies and institutional credibility in developing economies. As climate-related financial risks increasingly challenge conventional policy frameworks, central banks are progressively incorporating sustainability considerations into monetary and macroprudential strategies. Using a dynamic panel dataset and applying the two-step System GMM estimator, this study addresses endogeneity concerns, institutional persistence, and unobserved heterogeneity. The empirical findings provide robust evidence that sustainability-oriented central banking policies are positively and significantly associated with higher levels of institutional credibility, even after controlling for macroeconomic fundamentals, fiscal conditions, and alternative model specifications. The results further indicate that central bank credibility is a path-dependent institutional asset shaped by historical performance and forward-looking policy orientation. Green central banking initiatives appear to strengthen this asset when they are embedded within existing monetary and financial stability frameworks and framed as tools for managing long-term systemic risks. From a legal and institutional perspective, the study highlights that the credibility-enhancing effects of green central banking are conditional on mandate clarity, institutional quality, and governance capacity. Cross-country evidence suggests that gradual, institutionally embedded implementation strategies—supported by transparent communication and accountability mechanisms—are more effective in reinforcing credibility than ad hoc or weakly anchored initiatives. The findings offer important policy implications, particularly for central banks in developing economies, by demonstrating how sustainability-oriented policies can enhance institutional legitimacy without compromising core mandates.