Marie Fichtner

Universitetet i Oslo

This thesis introduces a Green Phillips Curve by integrating green and brown energy as factors of production into the standard New Keynesian framework. The model shows that a green energy price drop works like a positive technology shock. Implementing a permanent green energy subsidy results in the flex-price solution, leading to an increase in GDP, an unchanged inflation rate and a decrease in brown energy usage. While temporary subsidies initially mimic this outcome, households change their consumption behavior when the subsidy is about to expire. After over-consuming for several quarters, demand drops, causing deflation while firms raise prices. When temporary green energy subsidies are implemented, the central bank should weight the output gap and inflation equally in its Taylor rule to approximate the perfect competition solution. All results are contingent on exogenously given energy prices and also hold for the baseline model that only distinguishes between labor and energy.