IDEAS home Printed from https://ideas.repec.org/p/zbw/bubdps/313014.html
   My bibliography  Save this paper

Pro-cyclical emissions, real externalities, and optimal monetary policy

Author

Listed:
  • Giovanardi, Francesco
  • Kaldorf, Matthias

Abstract

We study optimal monetary policy in an analytically tractable New Key-nesian DSGE-model with an emission externality. Empirically, emissions are strongly pro-cyclical and output in the flexible price equilibrium overreacts to productivity shocks, relative to the efficient allocation. At the same time, output under-reacts relative to the flexible price allocation due to sticky prices. Therefore, it is not optimal to simultaneously stabilize inflation and to close the natural output gap, even though this would be feasible. Real externalities affect the LQ-approximation to optimal monetary policy and we extend the analysis of Benigno and Woodford (2005) to inefficient flexible price equilibria. For central banks with a dual mandate, optimal monetary policy places a larger weight on output stabilization and targets a non-zero natural output gap, implying a higher optimal inflation volatility.

Suggested Citation

  • Giovanardi, Francesco & Kaldorf, Matthias, 2025. "Pro-cyclical emissions, real externalities, and optimal monetary policy," Discussion Papers 04/2025, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdps:313014
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/313014/1/1919250379.pdf
    Download Restriction: no
    ---><---

    More about this item

    Keywords

    Optimal Monetary Policy; Carbon Emissions; Output Gap; Central Bank Loss Function; Phillips Curve;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:bubdps:313014. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/dbbgvde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.