Working Paper: CEPR ID: DP17906
Authors: Marco Del Negro; Julian di Giovanni; Keshav Dogra
Abstract: We develop a two-sector New Keynesian model to analyze the inflationary effects of climate policies. Climate policies do not force a central bank to tolerate higher inflation, but may generate a tradeoff between the central bank’s objectives for inflation and real activity. The presence and size of this tradeoff depends on how flexible prices are in the "dirty" and "green" sectors relative to the rest of the economy, and on whether climate policies consist of taxes or subsidies.
Keywords: inflation; green transition; central banks; tradeoffs; input-output linkages
JEL Codes: E12; E31; E52; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Climate policies (Q58) | Tradeoff between inflation and real activity (E31) |
| Increase in carbon taxes (H23) | Tradeoff between inflation and real activity (E31) |
| Degree of price stickiness in dirty and green sectors (L11) | Central bank's ability to maintain inflation targets (E52) |
| Nominal wage stickiness (J31) | Tradeoff between inflation and real activity (E31) |