Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/269133 
Year of Publication: 
2022
Series/Report no.: 
ECB Working Paper No. 2726
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
We analyse a gradual increase in the tax on emissions in a simple two-period New Key- nesian model with an AS-AD representation. We find that the increase in the tax today exerts inflationary pressures, but the expected further increase in the tax tomorrow depresses current demand, putting downward pressure on prices: we show that the second effect is larger. However, if households do not anticipate a future fall in income (because they are not rational or the government is not credible), the overall effect of the transition may be inflationary in the first period. We extend the analysis in a medium-scale DSGE model and we find again that the green transition is deflationary. Also in this larger model, by relaxing the rational expectations assumption, we show the transition may initially be inflationary.
Subjects: 
Expectations
AS AD
Aggregate Prices
Climate Policy
Pollution Tax
JEL: 
D84
E31
Q58
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-5313-9
Document Type: 
Working Paper

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