Will the green transition be inflationary? Expectations matter

Alessandro Ferrari and Valerio Nispi Landi

No 686, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We analyse a progressive increase in the tax on emissions in a simple two-period New Keynesian model with an AS-AD representation. We find that the increase in the tax today exerts inflationary pressures, but the expected further increase in the tax tomorrow depresses current demand, putting downward pressure on prices: we show that the second effect is larger. However, if households do not anticipate a future fall in income (because they are not rational or the government is not credible), the overall effect of the transition may be inflationary in the first period. We extend the analysis in a medium-scale DSGE model and we find again that the green transition is deflationary. Also in this larger model, by relaxing the rational expectations assumption, we show the transition may initially be inflationary.

Keywords: expectations; AS AD; aggregate prices; climate policy; pollution tax (search for similar items in EconPapers)
JEL-codes: D84 E31 Q58 (search for similar items in EconPapers)
Date: 2022-04
New Economics Papers: this item is included in nep-dge, nep-ene, nep-env and nep-mac
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Citations: View citations in EconPapers (13)

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Working Paper: Will the green transition be inflationary? Expectations matter (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:opques:qef_686_22

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