The Role of Monetary Policy During a Low-Carbon Transition

Government spending on low-carbon infrastructure could help boost productivity and limit any short-term negative impact of carbon reduction measures on growth, according to this study by Vivid Economics.

Although the low-carbon transition may lead to higher inflation in the short term, fiscal and monetary coordination may help to offset this, the authors predict. Central banks will likely need to ease interest rates in the longer term, and there is a case for monetary policy makers to ‘look through’ the inflation interest and put off any initial rise, they say.

The study models the macroeconomic impacts and monetary policy implications of a 2°C scenario. The model assumes the widespread introduction of a carbon tax, with a short-term economic shock resulting from its introduction.