Carbon Pricing and Inflation Expectations: Evidence from France

Abstract

This paper examines the impact of carbon pricing on firms' inflation expectations and its implications for central banks' price stability mandate. Carbon policy shocks are identified using high-frequency identification and combined with French firm-level survey data. We document that a change in carbon price increases firms' inflation expectations as well as their own expected and realized price growth. The effect on price expectations is more persistent than on actual price growth, resulting in negative forecast errors in the medium-/long-run. We show that a significant portion of the increase in inflation expectations is driven by indirect effects. Firms rely on their own business conditions to form expectations about aggregate price dynamics. Therefore, the expected positive growth in their own prices significantly contributes to the observed increase in inflation expectations. The study further reveals that firms' responses to the shocks vary based on the proportion of input costs allocated to energy expenditures. High energy-intensive firms tend to overreact more in terms of their own price expectations compared to the actual price changes induced by the shocks.

Keywords: Climate policies, Carbon pricing, Inflation expectations, Monetary policy, Survey data

JEL Classification: E31, E52, E58, Q43, Q54