Regime switching and the shape of the emission-income relationship

Nektarios Aslanidis and Anastasios Xepapadeas

Economic Modelling, 2008, vol. 25, issue 4, 731-739

Abstract: We explore the idea of regime switching as a new methodological approach in the analysis of the emission-income relationship. We formalize the idea by using a simple static model of profit maximization where above a threshold income level a more stringent environmental policy could induce a decreasing emission-income relationship. At the empirical level we estimate such a regime switching model and we estimate an inverse-V-shaped emission-income relationship for ambient concentrations of SO2 and smoke. We estimate thresholds which can be viewed as turning points, and which occur at reasonable values.

Date: 2008
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