Environmental Policy and Macroeconomic Dynamics in a New Keynesian Model

42 Pages Posted: 29 Sep 2013  

Barbara Annicchiarico

University of Rome, Tor Vergata - Department of Economics and Finance

Fabio Di Dio

Sogei S.p.a.

Date Written: September 27, 2013

Abstract

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.

Keywords: New Keynesian Model, Environmental Policy, Macroeconomic Dynamics, Monetary Policy

JEL Classification: E32, E50, Q58

Suggested Citation

Annicchiarico, Barbara and Di Dio, Fabio, Environmental Policy and Macroeconomic Dynamics in a New Keynesian Model (September 27, 2013). CEIS Working Paper No. 286. Available at SSRN: https://ssrn.com/abstract=2332124 or http://dx.doi.org/10.2139/ssrn.2332124

Barbara Annicchiarico (Contact Author)

University of Rome, Tor Vergata - Department of Economics and Finance ( email )

Rome, I-00133
Italy

Fabio Di Dio

Sogei S.p.a. ( email )

Via Mario Carucci n. 99 e 85
Roma, 00143
Italy
+39068544 9092 (Phone)

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