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Greenflation?

Author

Listed:
  • Olovsson, Conny

    (Research Department, Central Bank of Sweden)

  • Vestin, David

    (Research Department, Central Bank of Sweden)

Abstract
What are the real and nominal implications of a green transition to a state with sustainable energy production, and how should monetary policy react during such transition? Using a New-Keynesian model with an energy and a goods sector, we show that a green transition requires the relative price of energy to increase and the relative price of goods, the marginal cost of production, and the real wage to fall. We prove analytically that if energy is not used in production and nominal wages and goods prices are rigid, a flexible energy price and a monetary policy rule that sees through energy-price changes are sufficient for replicating the flex-price economy. If energy is used in production there will be deviations from efficiency but because energy’s share of income is small, these deviations are marginal unless the increase in the carbon tax is aggressive and/or monetary policy ill suited. During the green transition, it is optimal for monetary policy to see through the increasing energy prices and focus on core inflation. The result is a modest increase in CPI.

Suggested Citation

  • Olovsson, Conny & Vestin, David, 2023. "Greenflation?," Working Paper Series 420, Sveriges Riksbank (Central Bank of Sweden), revised 01 May 2023.
    • Handle: RePEc:hhs:rbnkwp:0420
    as

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    File URL: https://www.riksbank.se/globalassets/media/rapporter/working-papers/2023/no.-420-greenflation.pdf
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    References listed on IDEAS

    as
    1. Maximilian Konradt & Beatrice Weder di Mauro, 2021. "Carbon Taxation and Greenflation- Evidence from Europe and Canada," IHEID Working Papers 17-2021, Economics Section, The Graduate Institute of International Studies, revised 25 Dec 2022.
    2. John Hassler & Per Krusell & Conny Olovsson, 2021. "Directed Technical Change as a Response to Natural Resource Scarcity," Journal of Political Economy, University of Chicago Press, vol. 129(11), pages 3039-3072.
    3. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Inflation; green transition; monetary policy; climate change;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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