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: Agents may be unsure about the productive potential of green technology and of the non-polluting sector due to imprecise information or misguiding news. I study the impact of this deep uncertainty in the context of the transition to a low-carbon economy in a dynamic stochastic general equilibrium model with polluting and green sectors and agents who, due to their ambiguity aversion, take decisions under pessimistic expectations about the future productivity of the latter sector. 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.

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.

Abstract: Low confidence in the return from investment in the green sector may hinder sustainable financing and the transition to a low-carbon economy. I study the impact of this deep uncertainty in a dynamic stochastic general equilibrium model featuring both a polluting and a green sector with financially constrained firms and agents who, due to their ambiguity aversion, take decisions under pessimistic expectations about the future productivity of the latter sector. In the short term, losses of confidence can shift the balance of the economy in favor of investment in the polluting sector, leading to an increase in emissions and a reduction in green loans over time. State-contingent policies akin to sector-specific macroprudential rules are able to partially reinstate the balance of the system and mitigate the fall in green financing.