Research

Working papers

Climate Policies, Macroprudential Regulation, and the Welfare Cost of Business Cycles (with B. Annicchiarico and F. Diluiso)

Abstract: We study the performance of alternative climate policies in a dynamic stochastic general equilibrium model that includes an environmental externality and agency problems associated with financial intermediation. Heterogeneous polluting producers finance their capital acquisition by combining their resources with loans from banks, are subject to environmental regulation, are hit by idiosyncratic shocks, and can default. The welfare analysis suggests that a cap-and-trade system will entail substantially lower costs of the business cycle than a carbon tax if financial frictions are stringent, firm leverage is high, and agents are sufficiently risk-averse. Simple macroprudential policy rules can go a long way in reining in business cycle fluctuations, aligning the performance of price and quantity pollution policies, and reducing the uncertainty inherent to the chosen climate policy tool.

Work in progress

Green Ambiguity

Abstract: Agents may misperceive the productive potential of green technology and non-polluting sector due to imprecise information or misguiding news. I study the impact of such a lack of confidence in the context of the transition to a low-carbon economy in a dynamic stochastic general equilibrium model with two sectors and ambiguity-averse agents. The ``dirty'' sector generates emissions that affect the overall economy, while the productivity process in the ``green'' sector is perceived as ambiguous. In the short term, losses of confidence can shift the balance of the economy in favor of investment in the polluting sector and lead to an increase in emissions. Coupling environmental tax and green subsidy can partially counteract this imbalance when the long-run forecast of agents ends up realizing, while also avoiding delays in the green transition. A dynamic version of the policy mix is also able to mitigate the short-term effects of drops in confidence.

The transition to a green economy: Implications for monetary policy (with F. Diluiso and M. Hoffmann)

Abstract: How should monetary policy react to carbon tax shocks? We develop an Environmental New-Keynesian model to study the macroeconomic impact of these shocks and the most appropriate monetary policy response. We find that carbon tax shocks are trade-off inducing, causing inflation to rise and output to fall. This effect is magnified by the degree of complementarity between energy and other consumption goods, and between fossil fuels and labor. In the presence of imperfect complementarities in production and consumption, the optimal monetary policy response to a carbon tax hike is to lower policy rates, dampening real output fluctuations while maintaining long-term price stability. Using Taylor rules focused on core inflation results in lower welfare costs compared to rules that target headline inflation. Nonetheless, the welfare gains of targeting core inflation decrease when (i) the complementarity in production and consumption increases, (ii) the economy relies more on renewable energy.