Übung 4

Die Wechselwirkung zwischen Klimaschutzpolitik und Geldpolitik ist bedeutsam. Verschiedene Ansätze zur Bepreisung von Kohlenstoff führen zu unterschiedlichen Preisniveaus, einige stabil und vorhersehbar, andere volatil. Volatilität stellt Zentralbanken vor Herausforderungen bei der Vorhersage von Inflation und wirtschaftlichen Variablen.

Gleichzeitig kann Geldpolitik auch die Auswirkungen von Emissionsreduktion und extremen Wetterereignissen beeinflussen. Eine Erhöhung der Zinssätze als Reaktion auf steigende Kohlenstoffpreise kann einen Wirtschaftsabschwung verstärken und zu BIP-Rückgang, Arbeitslosigkeit und Wohlstandsverlust führen, was politische Gegenreaktionen auslösen und Emissionsreduzierung beeinträchtigen könnte.

Ein langfristiger Anstieg der Kohlenstoffpreise kann Lohnverhandlungen beeinflussen, da Arbeitnehmer eine Verringerung ihrer Kaufkraft befürchten. Unangemessene geldpolitische Reaktionen könnten eine Lohn-Preis-Spirale auslösen und zu anhaltender Inflation führen.

1. Known trajectory: The trajectory of the tax is predetermined and follows a predictable path over time.

2. Initial impact on price level: There will be a significant initial impact on the price level when the tax is first established.

3. Upward trend in prices: The real growth of the tax over time introduces an upward trend in prices, pushing the economy towards a higher overall rate of inflation.

In contrast, a cap-and-trade system operates differently, with permit prices being determined by market forces and potentially leading to volatility. Both approaches have implications for the monetary authority, but the predictability of a carbon tax and its impact on inflation require careful consideration in monetary policy management.

1. A carbon tax increases production costs and prices of carbon-intensive goods and services, negatively impacting real wages, consumption, investment, and output.

2. The policy may interact with existing taxes, particularly in the labor market, leading to further distortions in the economy. Using carbon tax revenue to reduce other tax rates could yield significant benefits.

3. Different climate policy frameworks can result in varied inflation and output dynamics, influencing the short-run response of monetary policy.

4. The optimal monetary policy framework has been a subject of debate, with inflation targeting, price-level targeting, and nominal income targeting being compared in the literature.

Overall, the impact of climate policy on the economy and the appropriate monetary policy response depends on various factors and require careful consideration.

The text discusses the interaction between a carbon tax policy and monetary regimes, particularly focusing on the response of a central bank to changes in inflation caused by the tax. Here are the key statements and a summary:

1. Nominal GDP rules and inflation targeting respond to demand shocks similarly: Both approaches involve raising interest rates in response to positive demand shocks. However, the magnitude of the interest rate change may differ since nominal GDP rules consider changes in output as well as inflation.

2. The main difference between nominal income and inflation targeting is the response to aggregate supply shocks: In the case of an aggregate supply shock where inflation rises and output falls, a nominal GDP rule weighs the changes equally. However, inflation targeting focuses primarily on inflation and may not respond to output changes.

3. The net macroeconomic impact of the carbon tax is negative: Assuming that positive supply impacts from tax reductions are not sufficient to fully offset the negative impact of the carbon tax itself, the overall effect on real output is negative. Output may return to its baseline growth rate, but at a lower level.

4. The response of a central bank to the carbon tax depends on the monetary regime: a. Strict inflation targeting: The central bank would raise interest rates in response to the inflation spike caused by the tax. However, this could further reduce output and appreciate the exchange rate, offsetting the increase in overall inflation caused by the tax. b. Flexible inflation targeting (FIT): The central bank might avoid exacerbating the output effect of the tax by not changing interest rates, considering the tax as a one-time step in the price trajectory. However, separating the impact of the tax from other events that affect the target might be challenging. c. Anticipating the impact of the carbon tax: If the central bank is aware of the tax and its future trajectory, it could adjust its target inflation rate accordingly, accommodating the policy.

5. Similar issues apply to a tradable permit policy: While the carbon tax is explicitly set in the policy, the future trajectory of permit prices would be uncertain. This uncertainty makes it more challenging for the central bank to adjust monetary policy to deal with price volatility generated by the permit trading system.

Summary: The text highlights that different monetary regimes, such as nominal GDP rules and inflation targeting, respond similarly to demand shocks but differ in their response to aggregate supply shocks. The net macroeconomic impact of a carbon tax is negative, leading to lower output levels relative to the baseline. The response of a central bank to the tax depends on the chosen monetary regime, with both strict inflation targeting and flexible inflation targeting having potential drawbacks. Anticipating and accommodating the impact of the tax in monetary policy would require careful consideration, especially regarding inflationary expectations. Similar issues would apply to a tradable permit policy, with the additional challenge of uncertain permit prices affecting monetary policy adjustments.

Summary for the FIRST part:

• Responding to the inflationary component alone would result in larger output losses compared to a monetary policy that aims to maintain high output and employment.

• Nominal income targeting is a suitable approach as it avoids creating expectations of higher future inflation and doesn't require precise understanding of climate policy shocks.

• Nominal income targeting is less affected by imprecise information about the current state of the economy compared to other monetary policy rules.

Summary for the SECOND part:

• Designing climate policy presents challenges for central banks in terms of their response.

• Fluctuating carbon prices under a cap-and-trade policy make inflation forecasting more difficult, while a carbon tax or a hybrid policy with stable prices would simplify the central bank's response.

• Climate change can increase the frequency and severity of negative supply shocks, making it harder for central banks to forecast output gaps and inflation.

• Nominal income targeting, which doesn't rely heavily on such forecasts, may be better suited for a world affected by climate disruptions.

• Evaluating climate policy and monetary policy together is crucial as managing them separately can lead to poor outcomes.

• Current popular macroeconomic models are inadequate for analyzing climate and monetary policy interactions, and more complex models like G-Cubed offer better understanding of the interdependence of these policies.

A sustained rise in the relative price of carbon could enter into wage negotiations, for example, if workers anticipate a decline in the buying power of their earnings, even if carbon-tax revenues are recycled. In this case, an inappropriate monetary policy response could lead to a wage–price spiral as people find it harder to forecast inflation and therefore lose an important anchor for inflation expectations. Inflation expectations could lead to a costly long-lived inflationary process.

Climate change and monetary policy: issues for policy design

Different approaches to imposing a price on carbon will impact energy and other prices differently; some

would provide stable and predictable price outcomes, and others could be more volatile.

More volatile prices pose greater challenges to central bank authorities than more predictable prices, in part because they complicate the forecasting of inflation and other economic variables that central banks use to benchmark their policies.

For instance, if continuously rising prices from carbon policy induce the central bank to raise interest rates to slow inflation, this would exacerbate the fall in overall economic activity from the carbon policy—thus lowering GDP, employment, and welfare relative to other ways a central bank could react.

when carbon taxes increase, total output declines

when now this carbon tax income is used to reduce other taxes, it is a supply shock in a positive direction, it increases the potential output, but only up to a certain amount, we assume that that this can not offset the full supply shock from the carbon tax.

interest rate raise would slow the economy more than only the carbon tax, it would also drive up the exchange rate, making exports more expensive and imports cheaper, which would decrease the inflation rate.

It is funny because if the CB would not change the interest rate in response to the new carbon tax, the inflation rate would have come back to baseline because it was a one-time shock and only the carbon-intensive goods would become more expensive

some banks use nominal GDP or inflation targeting.

If a bank would use nominal GDP as the parameter to behave, they would raise the interest rate less than a bank using inflation targeting

privaten Haushalte bei der Ausrichtung auf das nominale Einkommen von makroökonomischen Schocks können abgesichert werden, wenn der geldpolitische Kurs auf die Stabilisierung des nominalen Einkommens oder der Ausgaben ausgerichtet ist.

Während die reine Inflation mit einer größeren Emissionsreduzierung einhergeht, wird diese durch eine erhebliche, kostspielige Verringerung der Produktion erreicht, die von der Zentralbank selbst verursacht wird, wenn das einzige Ziel der Bank darin besteht, ihr Inflationsziel zu halten.

Zentralbanken stehen vor Herausforderungen im Zusammenhang mit der Klimapolitik:

1. Antizipation von Inflation und Produktionsrückgang: Eine alleinige Reaktion auf Inflation könnte Produktionsverluste vergrößern. Die Ausrichtung auf das nominale Einkommen ist attraktiv, da sie Erwartungen an höhere zukünftige Inflation vermeidet und keine genaue Kenntnis des klimapolitischen Schocks erfordert.

2. Ausgestaltung der Klimapolitik: Schwankende Kohlenstoffpreise erschweren die Inflationsprognose im Vergleich zu stabilen Preisen wie einer Kohlenstoffsteuer oder einem hybriden Ansatz.

3. Klimatische Störungen und negative Angebotsschocks: Klimatische Ereignisse erschweren die Prognose von Produktionslücken und Inflation, die in geldpolitischen Rahmenwerken eine Rolle spielen.

Zur Verbesserung des Verständnisses der Interdependenz von Geld- und Klimapolitik könnten Modelle wie G-Cubed eingesetzt werden, die komplexer sind als derzeit verwendete kleine DSGE-Modelle.