Expectations are key to carbon tax’s impact, says ECB paper

Euro symbol, Willy Brandt Platz, Frankfurt
The European Central Bank

An increase in carbon taxes is likely to put downward pressure on prices, a paper published by the European Central Bank finds.

In their paper, Alessandro Ferrari and Valerio Nispi Landi analyse the impact of a gradual increase in a carbon tax using different models. Expectations play a key role, the authors find.

Using a simple two-period New Keynesian model, they find that increasing the tax in the first period fuels inflationary pressures. But the expected tax increase in the second period

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