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Climate change and monetary policy

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  • Eisei Ohtaki

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.

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  • Eisei Ohtaki, 2023. "Climate change and monetary policy," Working Papers e176, Tokyo Center for Economic Research.
    • Handle: RePEc:tcr:wpaper:e176
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    References listed on IDEAS

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    1. Gaetano Bloise & Sergio Currarini & Nicholas Kikidis, 2002. "Inflation, Welfare, and Public Goods," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 4(3), pages 369-386, July.
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