Climate change and monetary policy

No e176, Working Papers from Tokyo Center for Economic Research

Abstract: Abstract: Motivated by recent climate actions of central banks and supervisors, this study develops an overlapping generations model of the environment and money and explores a role of monetary policy on climate problems. It is shown that a stationary monetary equilibrium exists uniquely but be suboptimal so that this study explores optimal policies. When a policymaker can control money growth rates only, any monetary policy cannot attain an optimal allocation but a certain positive money growth rate can be the second-best policy. In contrast, when a policymaker can choose tax instruments in addition to money growth rates, there exists a continuum of optimal combinations of money growth rates and tax instruments, which implement an optimal allocation as a stationary monetary equilibrium allocation. These results suggest that, to resolve climate problems, monetary and fiscal authorities need to coordinate with each other.

Pages: 21 pages
Date: 2023-01
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-env and nep-mon
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