The New Keynesian Climate Model

Jean-Guillaume Sahuc, Frank Smets and Gauthier Vermandel

No 2025-1, EconomiX Working Papers from University of Paris Nanterre, EconomiX

Abstract: Climate change confronts central banks with two inflationary challenges: climateflation and greenflation. We investigate their implications for monetary policy by developing and estimating a tractable nonlinear New Keynesian Climate model featuring climate damages and mitigation policies for the global economy. We find that mitigation policies aligned with the Paris Agreement result in higher, more persistent inflation than laissez-faire policies. Central banks can attenuate this inflationary pressure by accounting for the rising natural rate of interest, at the cost of lower GDP during the transition. This short-term trade-off ensures long-term macroeconomic stability resulting from a net-zero emission world.

Keywords: Climate change; inflation; monetary policy; E-DSGE model; Bayesian estimation; stochastic growth (search for similar items in EconPapers)
JEL-codes: E32 E52 Q50 Q54 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2025
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ene and nep-env
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Related works:
Working Paper: The New Keynesian Climate Model (2025)
Working Paper: The New Keynesian Climate Model (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:drm:wpaper:2025-1

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