Is the Green Transition Inflationary?

Title: Is the Green Transition Inflationary? (with Julian di Giovanni and Keshav Dogra)

Abstract: We develop a multisector New Keynesian model to analyze the macroeconomic effects of carbon taxes, and show that they generate an inflation-output tradeoff whose size depends on the relative price flexibility of the sectors most affected (directly or indirectly) by the tax. When calibrated to U.S. input-output data and sectoral heterogeneity in emissions and price stickiness, the model matches empirical responses of price indices to an energy shock. A $100/metric ton CO₂ tax substantially increases inflation if accommodated; curtailing this increase requires a prolonged contraction. Propagation via production linkages plays a key role.