Climate actions, market beliefs, and monetary policy

Barbara Annicchiarico (), Fabio Di Dio () and Francesca Diluiso ()

Journal of Economic Behavior & Organization, 2024, vol. 218, issue C, 176-208

Abstract: This paper studies the role of expectations and monetary policy in the economy's response to climate actions. We show that in a stochastic environment, without the standard assumption of the perfect rationality of agents, there is more uncertainty regarding the path and the economic impact of a climate policy, with a potential threat to the ability of central banks to maintain price stability. Market beliefs and behavioral agents increase the trade-offs inherent to the chosen mitigation tool, with a carbon tax entailing more emissions uncertainty than in a rational expectations model and a cap-and-trade scheme implying a more pronounced pressure on allowance prices and inflation. The impact on price stability is worsened by delays in the implementation of stringent climate policies, the lack of confidence in the ability of central banks to keep inflation under control, and the adoption of monetary rules tied to expectations rather than current macroeconomic conditions. Central banks can implement successful stabilization policies that reduce the uncertainty surrounding the impact of climate actions and support the greening process while remaining within their mandate.

Keywords: Monetary policy; Climate policy; Expectations; Inflation; Market sentiments; Business cycle (search for similar items in EconPapers)
JEL-codes: D83 E32 E71 Q50 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0167268123004407
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Climate Actions, Market Beliefs, and Monetary Policy (2022)
Working Paper: Climate Actions, Market Beliefs and Monetary Policy (2022)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:218:y:2024:i:c:p:176-208

DOI: 10.1016/j.jebo.2023.12.003

Access Statistics for this article

Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D.

More articles in Journal of Economic Behavior & Organization from Elsevier
Bibliographic data for series maintained by Catherine Liu ().