How do credit market frictions affect carbon cycles? an estimated DSGE model approach

Ying Tung Chan and Hong Zhao

MPRA Paper from University Library of Munich, Germany

Abstract: Recessions associated with financial crises have become common in the US since 1990. This paper examines the importance of the financial frictions for US carbon emissions dynamics. Our empirical analysis reveals that financial market conditions have a substantial and nonlinear impact on carbon emissions dynamics. We build and estimate an environmental dynamic stochastic general equilibrium model that features financial frictions and a risk shock (a type of credit shock). The results show that: (i) the presence of financial frictions doubles the volatility of carbon emissions under positive TFP and government expenditure shocks; (ii) the risk shock generates counterfactual paths that can largely replicate the movements in emissions growth; (iii) the contribution share of the risk shock to emissions growth dynamics reaches a peak of around 50% after each recession; (iv) the optimal carbon tax rate response to shocks heavily depends on the Taylor rule specification.

Keywords: Carbon tax; financial accelerator; business cycles (search for similar items in EconPapers)
JEL-codes: E32 E44 Q51 (search for similar items in EconPapers)
Date: 2019-08-16, Revised 2020-12-05
New Economics Papers: this item is included in nep-dge, nep-ene, nep-env, nep-fdg and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:106987

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