Pro-cyclical emissions, real externalities, and optimal monetary policy
Prometeia, Italy; Deutsche Bundesbank, Germany
New Keynesian DSGE model augmented with emission externality where carbon dioxide emissions negatively affect productivity through a damage function, creating pro-cyclical emissions that interact with nominal rigidities
Calvo pricing with fraction theta unable to adjust prices; production generates one unit of emissions per unit of output; emissions reduce productivity through damage function
Table 2 p.17
Optimal monetary policy under discretion with emission externality, baseline calibration with stock pollutant
Column (3) Stock pollutant model is the main four-equation model discussed throughout the paper as baseline