The Optimal Mix of Monetary and Climate Policy

Chuanqi Chen and Dongyang Pan

MPRA Paper from University Library of Munich, Germany

Abstract: Given central banks' recent interest in "greening the financial system", this research theoretically investigates the relationship between monetary and climate policy and tries to find their “optimal mix”. We build an Environmental Dynamic Stochastic General Equilibrium (E-DSGE) model with the consideration of illegal emission which is pervasive in many countries. According to the model, we find: First, the dynamic of monetary policy is influenced by the selection of regimes of climate policy and the effectiveness of enforcement of environmental regulation. Second, the coefficients in the traditional Taylor rule of monetary policy can be better set to enhance welfare when a certain regime of climate policy is given in the economy. This helps find the constrained optimums of a policy mix. Third, if the mitigation of climate change is augmented into the target of monetary policy, the economy’s welfare can be enhanced. However, under certain circumstances, a dilemma in such monetary policy makes it incompatible with the traditional mandate of central bank.

Keywords: Optimal Mix; Monetary Policy; Climate Policy; E-DSGE (search for similar items in EconPapers)
JEL-codes: E52 Q54 Q58 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-cba, nep-dge, nep-env, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/97718/1/MPRA_paper_97718.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/103750/1/MPRA_paper_103750.pdf revised version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:97718

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().