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Environmental Policy and Macroeconomic Dynamics in a New Keynesian Model

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This paper studies the dynamic behaviour of an economy under different environmental policy regimes in a New Keynesian (NK) model with nominal and real uncertainty. We find the following results: (i) an emissions cap policy is likely to dampen macroeconomic fluctuations; (ii) staggered price adjustment alters significantly the performance of the environmental policy regime put in place, especially with an emissions intensity target; (iii) welfare tends to be higher with a tax on emissions when prices are sticky; (iv) the optimal policy response to inflation is found to be very strong as long as welfare is not affected by environmental quality and the environmental policy does not consist in an emissions cap.

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  • Barbara Annicchiarico & Fabio di Dio, 2013. "Environmental Policy and Macroeconomic Dynamics in a New Keynesian Model," CEIS Research Paper 286, Tor Vergata University, CEIS, revised 30 Sep 2013.
  • Handle: RePEc:rtv:ceisrp:286
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    More about this item

    Keywords

    New Keynesian Model; Environmental Policy; Macroeconomic Dynamics; Monetary Policy;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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