Is the Green Transition Inflationary?
Abstract: Are policies aimed at fighting climate change inflationary? In a new staff report we use a simple model to argue that this does not have to be the case. The model suggests that climate policies do not force a central bank to tolerate higher inflation but may generate a trade-off between inflation and employment objectives. The presence and size of this trade-off 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; climate policy; green transition;
JEL Classification: E31;
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Provider: Federal Reserve Bank of New York
Part of Series: Liberty Street Economics
Publication Date: 2023-02-14