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.

Executive summary

The Bank of England published Staff Working Paper No. 1,211, "Navigating climate policy shocks: optimal monetary policy responses", on 9 October 2026. It is authored by Marco Carli, Francesca Diluiso and Mathias Hoffmann. The Bank states that staff working papers…

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