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Will the green transition be inflationary? Expectations matter

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  • Ferrari, Alessandro
  • Landi, Valerio Nispi

Abstract

We analyse a gradual increase in the tax on emissions in a simple two-period New Keynesian model with an AS-AD representation. We find that the increase in the tax today exerts inflationary pressures, but the expected further increase in the tax tomorrow depresses current demand, putting downward pressure on prices: we show that the second effect is larger. However, if households do not anticipate a future fall in income (because they are not rational or the government is not credible), the overall effect of the transition may be inflationary in the first period. We extend the analysis in a medium-scale DSGE model and we find again that the green transition is deflationary. Also in this larger model, by relaxing the rational expectations assumption, we show the transition may initially be inflationary. JEL Classification: D84, E31, Q58

Suggested Citation

  • Ferrari, Alessandro & Landi, Valerio Nispi, 2022. "Will the green transition be inflationary? Expectations matter," Working Paper Series 2726, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20222726
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    4. Coenen, Günter & Lozej, Matija & Priftis, Romanos, 2024. "Macroeconomic effects of carbon transition policies: An assessment based on the ECB’s New Area-Wide Model with a disaggregated energy sector," European Economic Review, Elsevier, vol. 167(C).
    5. Bartocci, Anna & Notarpietro, Alessandro & Pisani, Massimiliano, 2024. "“Green” fiscal policy measures and nonstandard monetary policy in the euro area," Economic Modelling, Elsevier, vol. 136(C).
    6. Yannis Dafermos & Andrew McConnel & Maria Nikolaidi & Servaas Storm & Boyan Yanovski, 2024. "Macroeconomic modeling in the Anthropocene: why the E-DSGE framework is not fit for purpose and what to do about it," Working Papers Series inetwp229, Institute for New Economic Thinking.
    7. Chafwehé, Boris & Colciago, Andrea & Priftis, Romanos, 2025. "Reallocation, productivity, and monetary policy in an energy crisis," European Economic Review, Elsevier, vol. 173(C).
    8. Yoshihiko Hogen & Yojiro Ito & Kenji Kanai & Naoya Kishi, 2024. "Changes in the Global Economic Landscape and Issues for Japan's Economy," Bank of Japan Working Paper Series 24-E-3, Bank of Japan.
    9. Le, Anh H., 2023. "Climate change and carbon policy: A story of optimal green macroprudential and capital flow management," IMFS Working Paper Series 191, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    10. Attílio, Luccas Assis, 2025. "Does energy transition affect domestic inflation?," Energy, Elsevier, vol. 332(C).
    11. Priftis, Romanos & Schoenle, Raphael, 2025. "Fiscal and macroprudential policies during an energy crisis," European Economic Review, Elsevier, vol. 179(C).
    12. Alessandro Moro & Valerio Nispi Landi, 2024. "Carbon taxes around the world: cooperation, strategic interactions, and spillovers," Temi di discussione (Economic working papers) 1445, Bank of Italy, Economic Research and International Relations Area.
    13. Guido Ascari & Andrea Colciago & Timo Haber & Stefan Wöhrmüller, 2025. "Inequality along the European green transition," Working Papers 830, DNB.
    14. Frankovic, Ivan & Kolb, Benedikt, 2024. "The role of emission disclosure for the low-carbon transition," European Economic Review, Elsevier, vol. 167(C).
    15. Giovanardi, Francesco & Kaldorf, Matthias, 2025. "Pro-cyclical emissions, real externalities, and optimal monetary policy," European Economic Review, Elsevier, vol. 179(C).
    16. Oscar Jaulin & Andrey Ramos, 2025. "Becoming Green: Decomposing the Macroeconomic Effects of Green Technology News Shocks," Papers 2507.18386, arXiv.org.
    17. Matsumura, Kohei & Naka, Tomomi & Sudo, Nao, 2024. "Analysis of the transmission of carbon taxes using a multi-sector DSGE," Energy Economics, Elsevier, vol. 136(C).
    18. Nicolás Aguila & Joscha Wullweber, 2024. "Greener and cheaper: green monetary policy in the era of inflation and high interest rates," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 14(1), pages 39-60, March.
    19. Dück, Alexander & Le, Anh H., 2023. "Transition risk uncertainty and robust optimal monetary policy," IMFS Working Paper Series 187, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    20. Nickel, Christiane & Kilponen, Juha & Moral-Benito, Enrique & Koester, Gerrit & Ciccarelli, Matteo & Enders, Almira & Holton, Sarah & Landau, Bettina & Venditti, Fabrizio & Bobeica, Elena & Brand, Cla, 2025. "A strategic view on the economic and inflation environment in the euro area," Occasional Paper Series 371, European Central Bank.
    21. Angelico, Cristina, 2024. "The green transition and firms' expectations on future prices: Survey evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 221(C), pages 519-543.
    22. Ciccarelli, Matteo & Marotta, Fulvia, 2024. "Demand or Supply? An empirical exploration of the effects of climate change on the macroeconomy," Energy Economics, Elsevier, vol. 129(C).

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    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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