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Climate-Conscious Monetary Policy

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  • Anton Nakov
  • Carlos Thomas

Abstract

We study the implications of climate change and mitigation measures for optimal monetary policy in a New Keynesian model with climate externalities. When set at their socially optimal level, carbon taxes pose no trade-offs: fully stabilizing inflation and the welfare-relevant output gap is both feasible and optimal. If carbon taxes are suboptimal, trade-offs arise between core and climate goals, but they are resolved overwhelmingly in favor of price stability—even in scenarios of decades-long transitions to optimal carbon taxation. This reflects interest rate policy’s inefficiency as a climate instrument. In an extension with financial frictions, “green quantitative easing” is optimal but has limited impact on emissions due to small eligible bond spreads.

Suggested Citation

  • Anton Nakov & Carlos Thomas, 2026. "Climate-Conscious Monetary Policy," Journal of Political Economy Macroeconomics, University of Chicago Press, vol. 4(2), pages 385-424.
    • Handle: RePEc:ucp:jpemac:doi:10.1086/740430
    DOI: 10.1086/740430
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