Forward guidance in climate policy

Riccardo Degasperi (), Tara Hamadi (), Filippo Natoli (), Valerio Nispi Landi () and Kevin Pallara ()
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Riccardo Degasperi: Bank of Italy
Tara Hamadi: Queen Mary University of London
Filippo Natoli: Bank of Italy
Valerio Nispi Landi: Bank of Italy
Kevin Pallara: Bank of Italy

No 1540, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We examine the macroeconomic implications of the green transition, focusing on the role of carbon policy. Using high-frequency surprises around regulatory events in the EU Emissions Trading System and a Proxy-SVAR framework, we identify two distinct shocks: one to the current policy stance (current stance shocks) and another to the expected path of the green transition (expected path shocks). Both types of shocks reduce greenhouse gas emissions and economic activity, but differ in their inflationary effects. Current stance shocks raise inflation, while expected path shocks are deflationary. A structural scenario analysis shows that monetary policy easing following a path shock substantially mitigates output losses and moderates the decline in inflation. Moreover, path shocks lower expected growth, depress economic sentiment and increase uncertainty, while also encouraging a reallocation towards greener assets and reducing climate-related risks. These findings align with the predictions of an environmental New Keynesian model. Our results highlight the importance of forward guidance in climate policy, emphasizing its role in shaping macroeconomic expectations and accelerating the transition to a low-carbon economy.

Keywords: climate policy; forward guidance; inflation; green transition (search for similar items in EconPapers)
JEL-codes: C3 E3 H23 Q58 (search for similar items in EconPapers)
Date: 2026-07
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