Is the Green Transition Inflationary?
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; central bank's tradoffs; green transition;
JEL Classification: E12; E31; E52; Q54;
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Provider: Federal Reserve Bank of New York
Part of Series: Staff Reports
Publication Date: 2023-02-01