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Greenflation?

Author

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  • Olovsson, Conny
  • Vestin, David

Abstract

Using a New-Keynesian model with an energy sector, we show that a green transition requires the real price of energy to increase and the real wage to fall. We prove analytically that if energy is not used in production and nominal wages and goods prices are rigid, a flexible energy price and a monetary policy rule that sees through energy-price changes are sufficient for replicating the flex-price allocation. If energy is used, there will be deviations from efficiency. Since energy’s share of income is small, these deviations are marginal unless the carbon tax is raised aggressively and/or monetary policy is ill-suited.

Suggested Citation

  • Olovsson, Conny & Vestin, David, 2026. "Greenflation?," European Economic Review, Elsevier, vol. 184(C).
    • Handle: RePEc:eee:eecrev:v:184:y:2026:i:c:s0014292125002879
    DOI: 10.1016/j.euroecorev.2025.105237
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    Keywords

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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