Analysis of Climate Policy and Monetary Policy Nexus in the Norwegian Context: A DSGE Approach

Abstract

This thesis aims to analyze the nexus between climate policy and monetary policy using the DSGE approach in the context of Norway. It considers two central themes: first, whether subsidization of electric vehicles could substantiate emission reduction, and second, whether it could be a better idea to involve the government in direct economic activities, such as production. New Keynesian macroeconomics provided essential theoretical and methodological foundations. Simulations over the selected variables followed by estimation using Dynare version 5.5 within the Matlab environment offered several results. The observed data series included the gross domestic product, consumer price index, returns on bonds, and emissions from Norwegian economic activities. All the series are related to Norway during 1990Q1:2022Q4. Data analysis occurred especially through impulse response function and historical decomposition methods.

The results show that climate policy through incentivization of electric vehicles does not contribute to emission reductions. On the other hand, public investment resulting from the direct involvement of government in the production activity contributes to influencing the evolution of several key macro variables such as employment and output along with greenhouse gas emissions. To conclude Monetary policy has substantial effects on causing variation in emission levels over time.