Research

Abstract: We study how alternative carbon pricing policies, namely carbon taxes and cap-and-trade schemes, affect macroeconomic dynamics and the welfare cost of business cycles in a dynamic stochastic general equilibrium model with financial frictions and pollution externalities. Financial frictions play a critical role in shaping how business cycle shocks propagate across carbon pricing regimes. We find that, with financial frictions, welfare costs are generally lower under cap-and-trade schemes than under carbon taxes, as procyclical permit prices dampen financial amplification. The welfare gap between the two policies narrows as credit markets become more efficient or countercyclical macroprudential regulation weakens shock transmission.

Abstract: This paper studies how ambiguity and low confidence about green technology impact the low‑carbon transition. I build an environmental DSGE model with a “dirty” and “green” sector and ambiguity‑averse agents who form worst‑case beliefs about future green productivity. Temporary losses of confidence shift investment and production towards the dirty sector, raising emissions. A revenue‑neutral policy mix that combines an environmental tax with a green subsidy is shown to partly rebalance the economy in the short term and support a more timely and less costly green transition in the long run. Allowing agents to gradually learn the true productivity of the green sector resolves the core inefficiency of the economy and aligns transition dynamics to the scenario without ambiguity.

Abstract: How should monetary policy respond to climate policy shocks? We develop an Environmental New-Keynesian model with green and fossil energy to assess the macroeconomic impacts of carbon pricing and green subsidy shocks and to identify the optimal monetary policy responses. Our findings indicate that these shocks create a policy trade-off between stabilizing inflation and the output gap. This trade-off is resolved in favor of output-gap stabilization, with optimal monetary policy focusing on dampening real output fluctuations while temporarily looking through inflation movements. Dual mandate Taylor rules yield lower welfare costs than inflation-only targeting rules and align the welfare performances of core and headline inflation targeting regimes.