Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/313014 
Year of Publication: 
2025
Series/Report no.: 
Deutsche Bundesbank Discussion Paper No. 04/2025
Publisher: 
Deutsche Bundesbank, Frankfurt a. M.
Abstract: 
We study optimal monetary policy in an analytically tractable New Key-nesian DSGE-model with an emission externality. Empirically, emissions are strongly pro-cyclical and output in the flexible price equilibrium overreacts to productivity shocks, relative to the efficient allocation. At the same time, output under-reacts relative to the flexible price allocation due to sticky prices. Therefore, it is not optimal to simultaneously stabilize inflation and to close the natural output gap, even though this would be feasible. Real externalities affect the LQ-approximation to optimal monetary policy and we extend the analysis of Benigno and Woodford (2005) to inefficient flexible price equilibria. For central banks with a dual mandate, optimal monetary policy places a larger weight on output stabilization and targets a non-zero natural output gap, implying a higher optimal inflation volatility.
Subjects: 
Optimal Monetary Policy
Carbon Emissions
Output Gap
Central Bank Loss Function
Phillips Curve
JEL: 
E31
E58
Q58
ISBN: 
978-3-98848-025-5
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.