Build Back Better : The Role of Green Monetary and Fiscal Policies

We establish a two-sector model to simulate the potential effects of green fiscal policies and unconventional green monetary policy on the economy during a recovery or in case of a stimulus policy. We find that instruments such as carbon tax, implicit tax on brown loans, and subsidy for the purchase of green goods are all found to be beneficial to the green sector in contrast to green quantitative easing. The carbon tax imposed directly on firms in the brown sector is the most efficient tool to reduce pollution. More importantly, the marginal effects of green instruments on the economy depend on consumer preferences. Namely, the marginal effects are the most prominent when consumers start to develop the habit of purchasing green goods. Furthermore, the effects of environmental policies are more efficient when the elasticity of substitution between green and brown goods increases. This finding suggests that raising consumers' awareness and ability to consume green goods reinforce the efficiency of public policies designed for low-carbon transition of the economy