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The New Keynesian Climate Model

Author

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  • Jean-Guillaume Sahuc
  • Gauthier Vermandel
  • Frank Smets

Abstract

Climate change confronts central banks with two inflationary challenges: climateflation and greenflation. We investigate their implications for monetary policy by developing anDéestimating a tractable nonlinear New Keynesian Climate model featuring climate damages and mitigation policies for the global economy. We find that mitigation policies aligned with the Paris Agreement result in higher, more persistent inflation than laissez-faire policies. Central banks can attenuate this inflationary pressure by accounting for the rising natural rate of interest, at the cost of lower GDP during the transition. This short-term trade-off ensures long-term macroeconomic stability resulting from a net-zero emission world.

Suggested Citation

  • Jean-Guillaume Sahuc & Gauthier Vermandel & Frank Smets, 2024. "The New Keynesian Climate Model," Working papers 977, Banque de France.
  • Handle: RePEc:bfr:banfra:977
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    More about this item

    Keywords

    Climate Change; Inflation; Monetary Policy; E-DSGE Model; Bayesian Estimation; Stochastic Growth;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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