Identifying efficient policy mix under emission mitigation and inflation targeting: A case of India

This article investigates the business cycle dynamics of different environmental policy interventions, to offer a viable solution for balanced macroeconomic stability with effective emission reduction. From the New Keynesian macroeconomic analysis, our findings imply a leading role of cap and trade policy in abating excessive emissions with a favorable macroeconomic effect. Of note, the results also indicate the significant role of inflationary targeting monetary policy relative to the conventional monetary policy in controlling the rising carbon emission. Our analysis passes several robustness checks. Overall, findings imply that the cap and trade policy, if operated under the inflationary targeting monetary policy framework, will result in a more efficient outcome as it not only increases output and reduces emissions but also controls the escalating inflation. However, the unrestricted use of this policy intervention for emission mitigation may be ill-advised because it can contribute to regional emission asymmetry.