This paper studies the dynamic behaviour of an economy under different environmental policy regimes in a New Keynesian model with nominal and real uncertainty. We find the following results: (i) an emissions cap policy is likely to dampen macroeconomic fluctuations; (ii) staggered price adjustment alters significantly the performance of the environmental policy regime put in place; (iii) the optimal environmental policy response to shocks is strongly influenced by the degree to which prices adjust and by the monetary policy reaction.

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This paper examines the optimal environmental and monetary policy mix in a New Keynesian model embodying pollutant emissions, abatement technology and environmental damage. The optimal response of the economy to productivity shocks is shown to depend crucially on the instruments policy makers have available, the intensity of the distortions they have to address (i.e. imperfect competition, costly price adjustment and negative environmental externality) and the way they interact.

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We introduce endogenous growth in an otherwise standard NK model with staggered prices and wages. Some results follow: (i) monetary volatility negatively affects long-run growth; (ii) the relation between nominal volatility and growth depends on the persistence of the nominal shocks and on the Taylor rule considered; (iii) a Taylor rule with smoothing increases the negative effect of nominal volatility on mean growth.