Abstract:
We study monetary policy under climate change in order to answer the question of whether monetary policy should take into account the expected impacts of climate change. The setup is a new Keynesian dynamic stochastic general equilibrium model of a closed economy in which a climate module that interacts with the economy has been incorporated, and the monetary authorities follow a Taylor rule for the nominal interest rate. The model is solved numerically using common parameter values and fiscal data from the euro area. Our results, which are robust to a large number of sensitivity checks, suggest non-trivial implications for the conduct of monetary policy.