Research

Confidence in the Phillips Curve (PC) as predictor of inflation developments along the business cycle has been shaken by recent “inflation puzzles” in advanced countries, such as the “missing disinflation” in the aftermath of the Great Recession and the “missing inflation” in the years of recovery, to which the Euro-Zone “excess deflation” during the post-crisis depression may be added. This paper proposes a newly specified Phillips Curve model, in which expected inflation, instead of being treated as an exogenous explanatory variable of actual inflation, is endogenized. The idea is simply that if the PC is used to foresee inflation, then its expectational component should in some way be the result of agents using the PC itself. As a consequence, the truly independent explanatory variables of inflation turn out to be the output gaps and the related forecast errors by agents, with notable empirical consequences. The model is tested with the Euro-Zone data 1999–2019 showing that it may provide a consistent explanation of the “inflation puzzles” by disentangling the structural component from the expectational effects of the PC.

In this paper, we discuss how environmental damage and emission reduction policies affect the conduct of monetary policy in a two-sector (clean and dirty) dynamic stochastic general equilibrium model. In particular, we examine the optimal response of the interest rate to changes in sectoral inflation due to standard supply shocks, conditional on a given environmental policy. We then compare the performance of a nonstandard monetary rule with sectoral inflation targets to that of a standard Taylor rule. Our main results are as follows: first, the optimal monetary policy is affected by the existence of environmental policy (carbon taxation), as this introduces a distortion in the relative price level between the clean and dirty sectors. Second, compared with a standard Taylor rule targeting aggregate inflation, a monetary policy rule with asymmetric responses to sector-specific inflation allows for reduced volatility in the inflation gap, output gap, and emissions. Third, a nonstandard monetary policy rule allows for a higher level of welfare, so the two goals of welfare maximization and emission minimization can be aligned.

This paper explores the macroeconomic and distributional impacts of the European Union’s transition to net zero emissions, focusing on carbon pricing and compensation policies. Using an Environmental Dynamic Stochastic General Equilibrium (E-DSGE) model that incorporates household heterogeneity and distinguishes between energy and non-energy sectors, the study examines the effects of both short-term shock and long-term transition. Carbon tax revenues are redistributed either as direct household transfers or as subsidies to green firms (both labor and price subsidies). In the short run, a carbon tax shock generates inflationary pressures and a contraction in output. Subsidies to green firms, while achieving the highest emission reductions, tend to exacerbate the consumption gap between households. Over the long run, a gradually increasing carbon tax drives the economy toward zero emissions. The policy remains inflationary over the medium term; however, as rational agents anticipate future income reductions, they adjust their energy demand, which partially dampens the supply-side impact. In this context, direct transfers effectively reduce income inequality, whereas firm subsidies increase the consumption gap while offering broader macroeconomic stabilization. The analysis is extended to scenarios incorporating expectation errors, flexible prices and exogenous growth in green technology.