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The Dynamic Effects of Environmental and Fiscal Policy Shocks

Richard Jaimes

No 19466, Vniversitas Económica from Universidad Javeriana - Bogotá

Abstract: This paper studies the effects of aggregate shocks to government spending and to the available abatement technology in an economy with a polluting intermediate goods sector and nominal rigidities. The model implies that an abatement cost shock leads to a decline in both output and consumption regardless the type of climate regulation in place. Nonetheless, it turns out that these negative responses are attenuated when environmental policy revenues are used to diminish either consumption or labor income taxes instead of rebating them via lump-sum transfers. On the other hand, the positive effects of a government spending shock on output are maximized when both prices and wages are rigid, there is a carbon tax scheme instead of a cap-and-trade system, and the expansion in public expenditures is financed through lump-sum taxation.

Keywords: New Keynesian model; environmental policy; macroeconomic dynamics; and fiscal policy (search for similar items in EconPapers)
JEL-codes: E32 E50 Q58 (search for similar items in EconPapers)
Pages: 39
Date: 2021-08-25
New Economics Papers: this item is included in nep-dge, nep-env, nep-isf and nep-mac
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