International Transmission of Environmental Policy: A New Keynesian Perspective

Giovanni Ganelli and Juha Tervala

No 58, Discussion Papers from Aboa Centre for Economics

Abstract: In this paper we examine the international transmission of environmental policy using a New Keynesian model of the global economy. We first consider the case in which the quality of the environment affects utility, but not productivity. This allows us to look at the trade-off between environmental quality and output. We then consider the case in which the quality of the environment increases productivity but does not affect utility. Our main results show that in both cases a unilateral implementation of a more stringent environmental policy by the domestic country raises foreign welfare under a benchmark parameterization. However, since this policy can have a negative impact on domestic utility but a positive one on world utility, an international coordination problem can arise in the implementation of environmental policy: no country will have an incentive to implement environmental reforms if there is a possibility that its trading partners will do so.

Keywords: Environmental Economics; Environmental Policy; International Policy Coordination; Open Economy Macroeconomics (search for similar items in EconPapers)
JEL-codes: E30 F41 F42 Q50 (search for similar items in EconPapers)
Pages: 30
Date: 2010-08
New Economics Papers: this item is included in nep-env, nep-mac and nep-res
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Journal Article: International transmission of environmental policy: A New Keynesian perspective (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:tkk:dpaper:dp58

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