Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/283402 
Year of Publication: 
2023
Series/Report no.: 
ECB Working Paper No. 2845
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
We study the implications of climate change and the associated mitigation measures for optimal monetary policy in a canonical New Keynesian model with climate externalities. Provided they are set at their socially optimal level, carbon taxes pose no trade-offs for monetary policy: it is both feasible and optimal to fully stabilize inflation and the welfare-relevant output gap. More realistically, if carbon taxes are initially suboptimal, trade-offs arise between core and climate goals. These trade-offs however are resolved overwhelmingly in favor of price stability, even in scenarios of decades-long transition to optimal carbon taxation. This reflects the untargeted, inefficient nature of (conventional) monetary policy as a climate instrument. In a model extension with financial frictions and central bank purchases of corporate bonds, we show that green tilting of purchases is optimal and accelerates the green transition. However, its effect on CO2 emissions and global temperatures is limited by the small size of eligible bonds' spreads.
Subjects: 
Ramsey optimal monetary policy
climate change externalities
Pigouvian carbon taxes
green QE
JEL: 
E31
E32
Q54
Q58
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-6210-0
Document Type: 
Working Paper

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