We study the relationship between business cycles and the design and effects of environmental policies, particularly those with economy-wide significance like climate policies. First, we provide a brief review of the literature related to this topic, from initial explorations using real business cycle models to New Keynesian extensions, open-economy variations, and issues of monetary policy and financial regulations. Next, we provide a list of the main findings that emerge from this literature that are potentially most relevant to policymakers, including the impacts of policy on volatility and how to design policy to adjust to cycles. Finally, we propose several important remaining research questions.
We thank the organizers of the NBER's Environmental and Energy Policy and the Economy conference and editors of the related publication, Tatyana Deryugina, Matthew Kotchen, and James Stock, as well as Spencer Banzhaf, Baran Doda, and Roberton Williams for very useful comments. We also thank Kukhee Han for valuable research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.