Green monetary and fiscal policies: The role of consumer preferences

Mohamed Tahar Benkhodja, Xiaofei Ma and Tovonony Razafindrabe

Resource and Energy Economics, 2023, vol. 73, issue C

Abstract: We establish a two-sector model to simulate the potential effects of green fiscal poli- cies and unconventional green monetary policy on the economy during a recovery or in case of a stimulus policy. We find that instruments such as a carbon tax, an implicit tax on brown loans, and a subsidy for the purchase of green goods are all beneficial to the green sector, in contrast to green quantitative easing. A carbon tax imposed directly on firms in the brown sector is the most effective tool to reduce pollution. More importantly, the marginal effects of green instruments on the economy depend on consumer preferences. Namely, the marginal effects are the most prominent when consumers start to purchase more green goods as an increasing part of their consumption basket. Furthermore, the effects of those green policies are more effective when the elasticity of substitution between green and brown goods increases. This finding suggests that raising consumers’ awareness and ability to consume green goods reinforce the effectiveness of public policies designed for low-carbon transition of the economy.

Keywords: Environmental policies; Economic recovery; Stimulus policy; E-DSGE; Consumers’ preferences; Elasticity of substitution (search for similar items in EconPapers)
JEL-codes: E10 E20 E52 E62 G21 Q58 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:resene:v:73:y:2023:i:c:s0928765523000258

DOI: 10.1016/j.reseneeco.2023.101370

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