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"Green" fiscal policy measures and non-standard monetary policy in the euro area

Author

Listed:
  • Anna Bartocci

    (Bank of Italy)

  • Alessandro Notarpietro

    (Bank of Italy)

  • Massimiliano Pisani

    (Bank of Italy)

Abstract
This paper evaluates the macroeconomic effects of increasing taxes on fossil fuels ("carbon tax") and subsidies for renewable energy and reducing labor income tax in the euro area, and the interaction of these effects with domestic monetary policy. The tax increase is announced, gradually implemented and fully anticipated by agents (thus it is conceptually different from a sudden and unexpected positive shock affecting the international prices of fossil fuels). The analysis makes use of a New Keynesian two-country model with an energy sector, calibrated to the euro area and the rest of the world. The main results are the following. First, an increase in the carbon tax generates recessionary effects. Second, higher subsidies for green energy and a lower labor tax can limit the macroeconomic cost of increasing the carbon tax. Third, if the monetary policy rate is at its effective lower bound, the fiscal policy mix generates short-run recessionary effects, which can be offset if the central bank, for monetary policy purposes, purchases long-term sovereign bonds in the secondary market, thus keeping long-term interest rates low.

Suggested Citation

  • Anna Bartocci & Alessandro Notarpietro & Massimiliano Pisani, 2022. ""Green" fiscal policy measures and non-standard monetary policy in the euro area," Temi di discussione (Economic working papers) 1377, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1377_22
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Patrick Gruning, 2022. "Fiscal, Environmental, and Bank Regulation Policies in a Small Open Economy for the Green Transition," Working Papers 2022/06, Latvijas Banka.
    2. Coenen, Günter & Lozej, Matija & Priftis, Romanos, 2024. "Macroeconomic effects of carbon transition policies: An assessment based on the ECB’s New Area-Wide Model with a disaggregated energy sector," European Economic Review, Elsevier, vol. 167(C).
    3. Alessandro Ferrari & Valerio Nispi Landi, 2023. "Toward a Green Economy: The Role of the Central Bank’s Asset Purchases," International Journal of Central Banking, International Journal of Central Banking, vol. 19(5), pages 287-340, December.
    4. Giovanardi, Francesco & Kaldorf, Matthias, 2024. "Climate change and the macroeconomics of bank capital regulation," Discussion Papers 13/2024, Deutsche Bundesbank.

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    More about this item

    Keywords

    environmental policy; energy policies; dynamic general equilibrium model; fiscal policy; monetary policy; euro area;
    All these keywords.

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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