Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/310442 
Year of Publication: 
2025
Series/Report no.: 
Danmarks Nationalbank Working Papers No. 208
Publisher: 
Danmarks Nationalbank, Copenhagen
Abstract: 
As part of the green transition, the European cap-and-trade scheme for CO2 emissions will be extended to cover consumer durables. We propose a New Keynesian model that features both, "brown" and "green" durable goods and show that if monetary policy follows a business-as-usual approach, the green transition will be inflationary, with headline inflation increasing by about 20 basis points over a fouryear transition period. Monetary policy faces a tradeoff: pursuing a strict inflation target will slow the green transition because green durable purchases are especially sensitive to interest rates. We quantify this tradeoff as we contrast headline and core-inflation targeting.
Subjects: 
Green transition
monetary policy tradeoff
consumer durables
JEL: 
E32
E52
E62
Document Type: 
Working Paper

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