Carbon Taxes and Inflationary Pressures: A DSGE Exploration of Economic Responses and Macroeconomic Challenges

This paper investigates the macroeconomic effects of carbon taxes, focusing on its implications on output, inflation, emissions, price rigidity, and persistent economic shocks. Using a dynamic stochastic general equilibrium (DSGE) model calibrated based on data from the Moroccan economy, the research finds that carbon taxes are successful in drastically decreasing emissions, with reductions reaching over 50%. However, the analysis reveals short-term economic consequences, including production contraction, lower investment, and inflationary pressures, especially in carbon-intensive industries. The results reveal that sectors less dependent on carbon inputs have more resilience and recover more swiftly from these consequences. Additionally, the research demonstrates the amplifying impacts of pricing rigidity and persistent shocks on the economy’s response to the carbon tax. The contribution of this research lies in its exploration of the interplay between carbon taxation and macroeconomic variables, underscoring the importance of implementing complementary policies to balance environmental objectives with economic stability during the transition to a low-carbon economy.