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Optimal Green Policy-mix

Author

Listed:
  • Lise Clain-Chamosset-Yvrard

    (Université Lumière Lyon 2, CNRS, Université Jean-Monnet Saint-Etienne, Emlyon business school, GATE, 69007, Lyon, France)

  • Nicolas Clootens

    (Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE)

  • Daria Onori

    (Laboratoire d’Economie d’Orléans, University of Orléans, France)

Abstract

This paper highlights, in a voluntary very simple framework, why central bankers must consider environmental factors when determining monetary policy. To this aim, we propose a monetary overlapping generations (OLG) economy in which households derive satisfaction from both consumption and environmental quality. Production is viewed as a polluting activity that degrades environmental quality. Agents can improve environmental quality by engaging in environmental maintenance expenditures. In addition, the government can impose a carbon tax, though it may face constraints in doing so. The central bank determines the rate of monetary growth. We then characterize the inter-temporal equilibrium and the steady state. We show that the steady-state level of capital increases with the rate of money growth, while environmental quality exhibits an inverse U-shaped relationship with money growth. Money growth decreases the relative price of the environment. When income is low, increases in income lead to higher maintenance expenditures that more than compensate for new emissions. At higher income levels, however, the additional emissions from pollution are no longer offset by maintenance efforts. We then analyze welfare and the decentralization of the optimal steady state. We show that there is only one level of the money growth rate that is compatible with the first-best allocation. This specific level can achieve the first-best outcome only if the government sets the appropriate tax rate, which we characterize. When the government chooses a sub-optimal tax rate (e.g. due to some political acceptability constraint), a "constrained" optimal allocation can be attained if the central bank acts to compensate for the government’s shortcomings. We therefore characterize the optimal money growth rate as a function of the carbon tax and other environmental parameters.

Suggested Citation

  • Lise Clain-Chamosset-Yvrard & Nicolas Clootens & Daria Onori, 2025. "Optimal Green Policy-mix," Working Papers 2507, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
  • Handle: RePEc:gat:wpaper:2507
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    More about this item

    Keywords

    Environment; Monetary Policy; Carbon tax; Overlapping Generations;
    All these keywords.

    JEL classification:

    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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