Monetary Policy and the Intergenerational Incidence of Green Inflation

Carbon pricing is inflationary in the short run, and central banks must decide how hard to lean against this green inflation. I embed a monetary block–a reduced-form Phillips curve, an IS-type demand relation, and a Taylor-type policy rule–into a two-sector overlapping-generations transition economy in which carbon taxation generates a hump-shaped, cost-push inflation process. I derive an augmented Taylor principle for determinacy that is generally weaker than the classical unit threshold, and show that the monetary stance reallocates the burden of green inflation across generations: a hawkish rule protects the old, whose nominal wealth would otherwise be eroded by realised inflation, but taxes the young through a larger output and wage contraction. A closed-form monetary-neutral coefficient equalises the two losses, independent of price stickiness and of the size of the cost-push shock. Because monetary policy alone cannot correct distribution without an efficiency cost, I show that pairing a stabilisation-only interest-rate rule with a lump-sum fiscal transfer replicates equity at a lower output cost, and that transitional monetary hawkishness permanently raises the long-run carbon stock through a portfolio-substitution channel.