Environmental Policy and Macroeconomic Dynamics in a New Keynesian Model
42 Pages Posted: 29 Sep 2013
Date Written: September 27, 2013
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: Suggested Citation