Research

This paper explores the macroeconomic and distributional effects of the European Union's transition to Net Zero emissions through a gradually increasing carbon tax. The analysis is conducted within an Environmental DSGE model featuring two household types and distinct energy and non-energy sectors. Five alternative uses of carbon tax revenues are considered: equal transfers to households, targeted transfers to hand-to-mouth households, subsidies to green energy firms, and reductions in labor and capital income taxes. The results indicate that, absent technological progress, the carbon tax induces a recession, reduces investment and consumption, and results in permanently higher energy prices. However, aggregate inflation turns deflationary after the initial adjustment. Different recycling schemes reveal a clear trade-off between efficiency and equity. Targeted transfers are the most progressive, but they entail the largest macroeconomic costs. Subsidies and tax cuts, on the other hand, mitigate output and investment, but they are more regressive. When agents revise expectations at intermediate policy targets, adjustment paths become more volatile, and inflation temporarily rises around announcements. These findings underscore the importance of designing policies that balance efficiency and equity during the Net Zero transition.

Confidence in the Phillips Curve (PC) as predictor of inflation developments along the business cycle has been shaken by recent “inflation puzzles” in advanced countries, such as the “missing disinflation” in the aftermath of the Great Recession and the “missing inflation” in the years of recovery, to which the Euro-Zone “excess deflation” during the post-crisis depression may be added. This paper proposes a newly specified Phillips Curve model, in which expected inflation, instead of being treated as an exogenous explanatory variable of actual inflation, is endogenized. The idea is simply that if the PC is used to foresee inflation, then its expectational component should in some way be the result of agents using the PC itself. As a consequence, the truly independent explanatory variables of inflation turn out to be the output gaps and the related forecast errors by agents, with notable empirical consequences. The model is tested with the Euro-Zone data 1999–2019 showing that it may provide a consistent explanation of the “inflation puzzles” by disentangling the structural component from the expectational effects of the PC.

This paper examines how environmental externalities and fiscal policies aimed at reducing emissions affect the conduct of monetary policy in a two-sector (clean and dirty) environmental dynamic stochastic general equilibrium (E-DSGE) model. We analyze the response of monetary policy to sector-specific inflationary shocks under different environmental policy regimes and compare the performance of standard and non-standard monetary policy rules. In our framework, while the sectors are symmetric in terms of technology and nominal price rigidity, environmental fiscal policies - such as carbon taxes or emission caps that affect only the dirty sector - generate relative price distortions. Our findings highlight three key results. First, environmental policies introduce distortions in relative prices, altering the conduct of (Ramsey) optimal monetary policy. Second, a non-standard monetary rule targeting sector-specific inflation mitigates output, inflation, and emissions volatility more effectively. Third, this non-standard rule improves welfare across all environmental policy scenarios but leads to higher emissions, except under a cap policy, where emissions remain fixed by design. These findings underscore the critical role of policy-induced price asymmetries, besides structural ones, in shaping monetary policy responses, and reveal the complex interplay between monetary and environmental fiscal policies along with the trade-offs in designing optimal policy frameworks.