Research

This paper examines the macroeconomic and distributional effects of the European Union's transition to Net Zero emissions through a gradually increasing carbon tax. I develop a New Keynesian Environmental DSGE model with 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. In the absence of technological progress, the carbon tax policy induces a persistent increase in energy prices and a reduction in GDP, investment, and consumption. Headline inflation falls below zero in the medium run, reflecting weaker aggregate demand. Distributional outcomes vary significantly depending on the implemented revenue recycling scheme: targeted transfers are the most progressive but entail larger macroeconomic costs, while subsidies and tax cuts mitigate output and investment losses but are less effective in narrowing the consumption gap. A limited foresight scenario, in which agents learn about policy targets sequentially, generates more volatile adjustment paths and temporary inflationary spikes around announcements, but long-run outcomes remain close to the baseline.

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.