How does the green transition affect the neutral interest rate?
News, Staff memo In a new staff memo, two economists at the Riksbank’s Monetary Policy Department analyse how the green transition can affect the neutral interest rate, in a model consisting of a green sector and a fossil-based sector, along with an environmental block. An important factor for the results is the mobility of capital between the sectors.
If capital can move freely between sectors without adjustment costs, a carbon tax puts downward pressure on the neutral rate, while green subsidies result in upward pressure. If, on the other hand, there are adjustment costs, both a carbon tax and green subsidies lead to upward pressure on the neutral rate in the green sector, but downward pressure in the fossil-based sector. The analysis also shows that, if the green transition takes place solely through households and companies changing their preferences in a greener direction, the effects on the neutral interest rate are marginal.
Staff memo
A Staff Memo provides members of the Riksbank’s staff with the opportunity to publish advanced analyses of relevant issues. It is a publication for civil servants that is free of policy conclusions and individual standpoints on current policy issues. Publication is approved by the appropriate Head of Department. The opinions expressed in Staff Memos are those of the authors and should not be regarded as the Riksbank’s standpoint.