Expectations are key to carbon tax’s impact, says ECB paper
Inflation may rise if consumers doubt government’s commitment to raise green taxes, research finds
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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