Navigating climate policy shocks: optimal monetary policy responses

Marco Carli, Francesca Diluiso and Mathias Hoffmann
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Marco Carli: Italian Ministry of Economy and Finance and Tor Vergata University
Francesca Diluiso: Bank of England
Mathias Hoffmann: Deutsche Bundesbank

No 1211, Bank of England Staff Working Paper series from Bank of England

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.

Keywords: Climate policy; E-DSGE models; monetary policy trade-offs; supply shocks. (search for similar items in EconPapers)
JEL-codes: E31 E52 Q43 Q58 (search for similar items in EconPapers)
Pages: 44
Date: 2026-10-09
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:023787

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