Daria ONORI

This paper highlights, in a voluntary very simple framework, why central bankers must consider environmental factors when determining monetary policy. To this aim, we propose a monetary overlapping generations (OLG) economy in which households derive satisfaction from both consumption and environmental quality. Production is viewed as a polluting activity that degrades environmental quality. Agents can improve environmental quality by engaging in environmental maintenance expenditures. In addition, the government can impose a carbon tax, though it may face constraints in doing so. The central bank determines the rate of monetary growth. We then characterize the inter-temporal equilibrium and the steady state. We show that the steady-state level of capital increases with the rate of money growth, while environmental quality exhibits an inverse U-shaped relationship with money growth. Money growth decreases the relative price of the environment. When income is low, increases in income lead to higher maintenance expenditures that more than compensate for new emissions. At higher income levels, however, the additional emissions from pollution are no longer offset by maintenance efforts. We then analyze welfare and the decentralization of the optimal steady state. We show that there is only one level of the money growth rate that is compatible with the first-best allocation. This specific level can achieve the first-best outcome only if the government sets the appropriate tax rate, which we characterize. When the government chooses a sub-optimal tax rate (e.g. due to some political acceptability constraint), a "constrained" optimal allocation can be attained if the central bank acts to compensate for the government's shortcomings. We therefore characterize the optimal money growth rate as a function of the carbon tax and other environmental parameters.

Rational expectations are often questioned in light of their overly demanding assumptions. Thus, an increasing literature introduces some form of bounded rationality.

In this paper, we study real and monetary growth models with agents endowed with limited foresight. Accordingly, in each period, economic plans extend only for a limited number of periods and are reformulated in each subsequent date. We show that limited foresight may lead to capital under-investment and be thus growth-detrimental. However, by relaxing progressively myopia, the economy converges to the Perfect Foresight equilibrium. We prove the existence of a monetary Balanced Growth Path (BGP ) beside the non monetary one and compare it with the outcome obtained under perfect foresight. We also perform a stability analysis and show that the monetary BGP is globally unstable (stable) while the non monetary one is globally stable (unstable) when money is positive (negative). Finally, we identify the optimal monetary policy maximizing welfare. Limited foresight, in contrast to a widespread literature, thus restores monetary equilibria even in absence of limited participation, financial frictions and borrowing constraints.