“Green” fiscal policy measures and nonstandard monetary policy in the euro area

Abstract

The paper builds a two-region New Keynesian model with a complex energy production sector. It is calibrated to the euro area (EA) and the rest of the world. It simulates the gradual introduction of a carbon tax in the EA and finds recessionary and disinflationary effects. When green energy is subsidized and labor taxes are reduced, the recession becomes much smaller. As green fiscal policy is disinflationary in the model, assuming a binding effective lower bound on the monetary policy rate may reduce these positive effects. This can be prevented by allowing the central bank to purchase long-term sovereign bonds for monetary policy reasons.