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