Work

Consumer durables, monetary policy, and the green transition

Year: 2025

Type: article

Abstract: As part of the green transition, the European cap-and-trade scheme for CO 2 emissions will be extended to include consumer durables. We propose a New Keynesian model that features both “brown” and “green” durable goods, and show that if monetary policy follows a business-as-usual approach, the green transition will be inflationary, with headline inflation rising by up to 20 basis points. Monetary policy faces a tradeoff: strictly targeting headline inflation slows the green transition, as purchases of green durables are particularly sensitive to interest rates. We explore this tradeoff by comparing adjustment dynamics under a headline-inflation target and a core-inflation target.

Source: European Economic Review

DOI: 10.1016/j.euroecorev.2025.105207

Authors: Alexander M. Dietrich, Lukas Leitenbacher, Gernot J. Müller

Institutions: Danmarks Nationalbank, University of Tübingen, Centre for Economic Policy Research

Language: English

Topic: Monetary Policy and Economic Impact

Subfield: General Economics, Econometrics and Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDGs: Climate action, Responsible consumption and production

Open Access status: hybrid

Estimated APC paid: $3,690