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Climate-conscious monetary policy

Author

Listed:
  • Anton Nakov

    (ECB and CEPR)

  • Carlos Thomas

    (Banco de España)

Abstract

We study the implications of climate change and the associated mitigation measures for optimal monetary policy in a canonical New Keynesian model with climate externalities. Provided they are set at their socially optimal level, carbon taxes pose no trade-offs for monetary policy: it is both feasible and optimal to fully stabilize inflation and the welfare-relevant output gap. More realistically, if carbon taxes are initially suboptimal, trade-offs arise between core and climate goals. These trade-offs however are resolved overwhelmingly in favor of price stability, even in scenarios of decades-long transitions to optimal carbon taxation. This reflects the untargeted, inefficient nature of (conventional) monetary policy as a climate instrument. In a model extension with financial frictions and central bank purchases of corporate bonds, we show that green tilting of purchases is optimal and accelerates the green transition. However, its effect on CO2 emissions and global temperatures is limited by the small size of eligible bonds’ spreads.

Suggested Citation

  • Anton Nakov & Carlos Thomas, 2023. "Climate-conscious monetary policy," Working Papers 2334, Banco de España.
    • Handle: RePEc:bde:wpaper:2334
    DOI: https://doi.org/10.53479/34755
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    Cited by:

    1. Jean-Guillaume Sahuc & Gauthier Vermandel & Frank Smets, 2024. "The New Keynesian Climate Model," Working papers 977, Banque de France.
    2. Luca Fornaro & Veronica Guerrieri & Lucrezia Reichlin, 2025. "Monetary policy for the green transition," BIS Papers, Bank for International Settlements, number 160, May.
    3. Masciandaro, Donato & Russo, Riccardo, 2024. "Monetary and macroprudential policies: How to Be green? A political-economy approach," Economic Modelling, Elsevier, vol. 141(C).
    4. Semik, Sofia, 2025. "Carbon Pricing and Monetary Policy in an Estimated Macro-Climate Model," VfS Annual Conference 2025 (Cologne): Revival of Industrial Policy 325397, Verein für Socialpolitik / German Economic Association.
    5. Priftis, Romanos & Schoenle, Raphael, 2025. "Fiscal and macroprudential policies during an energy crisis," European Economic Review, Elsevier, vol. 179(C).
    6. Zia, Hafiz Muhammad Yasir & Yang, Wanping & Masood, Abdullah & Ahmed, Afaf & Aldawsari, Salem Hamad, 2025. "Can money help to achieve the Paris agreement goal? the missing piece of the puzzle: How green monetary policy can bridge the emissions gap," Economic Analysis and Policy, Elsevier, vol. 85(C), pages 494-529.
    7. Mar Delgado-Téllez & Javier Quintana & Daniel Santabárbara, 2025. "Carbon pricing, border adjustment and renewable energy investment: a network approach," Working Papers 2506, Banco de España.

    More about this item

    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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