International Transmission of the Business Cycle and Environmental Policy
46 Pages Posted: 19 Dec 2017
Date Written: December 18, 2017
This paper presents a baseline dynamic general-equilibrium model of environmental policy for a two-country economy and studies the international transmission of several asymmetric shocks considering three different economy-wide greenhouse gases (GHG) emission regulations: (i) national cap-and-trade, (ii) carbon tax, and (iii) international cap-and-trade system allowing for cross-border allocation of emission permits. We find that international spillovers of shocks originated in one country are strongly influenced by the environmental regime put in place. We show that, while a national cap-and-trade system diminishes the international spillovers by dampening the response of the country hit by shocks, the cross-border reaction to supply-side shocks is found to be magnified under an international cap-and-trade system, while demand shocks are more intensively transmitted under a carbon tax. The pattern of trade and the underlying monetary regime influence the cross-border transmission channels interacting with the environmental policy adopted.
Keywords: Open Economy Macroeconomics, GHG Emission Control, Macroeconomic Dynamics
JEL Classification: F41, F42, E32, Q58
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