Consumer Durables, Monetary Policy, and the Green Transition

Alexander Dietrich, Lukas Leitenbacher and Müller, Gernot

No 19764, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: As part of the green transition, the European cap-and-trade scheme for CO2 emissions will be extended to cover consumer durables. We propose a New Keynesian model that features both, "brown" and "green" durable goods and show that if monetary policy follows a business-as-usual approach, the green transition will be inflationary, with headline inflation increasing by about 20 basis points over a four-year transition period. Monetary policy faces a tradeoff: pursuing a strict inflation target slows the green transition because green durable purchases are especially sensitive to interest rates. We quantify this tradeoff as we contrast headline and core-inflation targeting.

Keywords: Green; transition (search for similar items in EconPapers)
JEL-codes: E32 E52 E62 (search for similar items in EconPapers)
Date: 2024-12
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