Do Monetary Policy Shocks Affect CO2 Emissions? Evidence from Brazil

This paper examines whether monetary policy shocks affect CO2 emissions over time in Brazil. We show that CO2 emissions decline persistently following contractionary monetary policy shocks. The relationship between monetary policy and CO2 emissions in Brazil is assessed through two channels: trade openness and exchange rates. The theoretical model illustrates how monetary policy affects the domestic economy through the real exchange rate. An application of a Global VAR (GVAR) to the Brazilian economy from 1996 to 2018 investigates the effects of monetary policy in Brazil (or in the U.S.) on real GDP and, subsequently, on CO2 emissions. A contractionary monetary policy shock in Brazil causes a short-run appreciation of the currency, lower output in the long run, and lower CO2 emissions (−0.02% after 24 months). A contractionary U.S. monetary policy shock also causes a decline in the stock market and a short-run depreciation of the currency. This shock leads to lower output in the long run, reducing CO2 emissions by −0.01% after 20 months.