Monetary Policy and the Intergenerational Incidence of Green Inflation

Abstract of the article
Carbon pricing is inflationary in the short run, and central banks must decide how hard to lean against this green inflation. I embed a monetary block–a reduced-form Phillips curve, an IS-type demand relation, and a Taylor-type policy rule–into a two-sector overlapping-generations transition economy in which carbon taxation generates a hump-shaped, cost-push inflation process. I derive an augmented Taylor principle for determinacy that is generally weaker than the classical unit threshold, and show that the monetary stance reallocates the burden of green inflation across generations: a hawkish rule protects the old, whose nominal wealth would otherwise be eroded by realised inflation, but taxes the young through a larger output and wage contraction. A closed-form monetary-neutral coefficient equalises the two losses, independent of price stickiness and of the size of the cost-push shock. Because monetary policy alone cannot correct distribution without an efficiency cost, I show that pairing a stabilisation-only interest-rate rule with a lump-sum fiscal transfer replicates equity at a lower output cost, and that transitional monetary hawkishness permanently raises the long-run carbon stock through a portfolio-substitution channel.
Published Date:November 2, 2026
Positive Science - Economics, 2026, Article 20.
https://doi.org/10.65957/article.20

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