Research

The European Union has committed to Net Zero emissions by 2050, which implies three decades of rising carbon prices. Who bears the cost of this transition, and how  should carbon revenues be used? I study these questions in a two-agent New Keynesian model with energy and non-energy sectors, in which Hand-to-Mouth households  spend more on energy, save little and rely on labor income. Without green technological progress, reaching Net Zero lowers GDP by about 2% and raises energy prices, while headline inflation remains slightly negative. The cost is borne unequally, and mainly  through income: wages fall permanently while the return on capital is restored, so consumption inequality widens. For a given emission path, how revenues are recycled decides  who pays. Cutting income taxes limits the output loss, but only transfers targeted to Hand-to-Mouth households prevent the rise in inequality, and they yield the smallest welfare loss. Credibility also matters: when agents learn the targets sequentially, output drops abruptly at each revision.

This paper studies how environmental fiscal policies like carbon taxes and emission caps affect the conduct of monetary policy in a two-sector Environmental Dynamic Stochastic General Equilibrium model. The clean and dirty sectors are symmetric in technology and price rigidity, but only dirty production generates emissions, which reduce aggregate productivity through a damage function. We use Ramsey optimal policy as a benchmark and compare an optimized standard Taylor rule with an optimized sectoral-inflation rule that responds separately to clean and dirty inflation. Three results emerge. First, the environmental externality makes the optimal monetary response differ between clean and dirty shocks; carbon taxes and caps further strengthen this asymmetry by driving a wedge between sectoral marginal costs. Second, when shocks are sector-specific, the sectoral-inflation rule delivers higher household welfare than the standard rule across all environmental regimes. Third, this welfare gain comes with modestly higher emissions outside the cap regime. Policy-induced and externality-induced sectoral asymmetries thus matter for monetary policy alongside the structural asymmetries already studied in the multi-sector New Keynesian literature.

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.