Bank of England working paper backs output-gap stabilisation over inflation in climate-policy shocks
A Bank of England staff working paper models how monetary policy should respond when carbon pricing and green subsidy shocks hit the economy. Its conclusion is pointed: the resulting trade-off between inflation and output should be resolved towards stabilising output, with policymakers temporarily looking through inflation. It is research in progress, not Bank policy, but worth a few minutes for anyone tracking how climate transition reshapes rate-setting thinking.
- Staff Working Paper No. 1,211 was published by the Bank of England on 9 October 2026 and authored by Marco Carli, Francesca Diluiso and Mathias Hoffmann.
- The authors build an Environmental New-Keynesian model with green and fossil energy to assess carbon pricing and green subsidy shocks.
- The paper finds these shocks create a trade-off between stabilising inflation and the output gap, resolved in favour of output-gap stabilisation while temporarily looking through inflation.
- Dual-mandate Taylor rules yield lower welfare costs than inflation-only targeting rules and align the welfare performance of core and headline inflation targeting regimes.
- The Bank states that staff working papers set out research in progress intended to encourage comments and debate.