Author : Eunseong Ma(Yonsei University), Joonseok Oh(University of Southampton), Byung Goog Park(Bank of Korea), Kyounghoon Park(Bank of Korea)

We study how macroeconomic and energy-related shocks, together with climate-policy design, affect output, inflation, the energy mix, emissions, and distribution in a small energy-importing economy such as Korea. We develop a small open-economy DSGE model with two types of energy: imported fossil-based (“brown”) energy and domestically produced renewable (“green”) energy. Households directly consume a bundle of brown and green energy, and firms use the same energy composite in production. This structure allows aggregate shocks and policies—operating through the relative price of brown versus green energy—to feed directly into consumption choices, firms’ input mix and marginal costs, and hence inflation and output dynamics. Quantitatively, green-technology shocks are expansionary, disinflationary, and carbon-reducing, whereas UIP and brown-energy price shocks are also carbon-reducing but at the cost of stagflation. For a given carbon-tax path, the allocation of revenues has first-order effects on both the output and the inflation dynamics. Monetary policy mainly allocates the burden of shocks between output and inflation, with only minor effects on emissions. The elasticity of substitution between brown and green energy is crucial for the output–emissions trade-off.