International Transmission of the Business Cycle and Environmental Policy

46 Pages Posted: 19 Dec 2017

See all articles by Barbara Annicchiarico

Barbara Annicchiarico

University of Rome, Tor Vergata - Department of Economics and Finance; University of Rome Tor Vergata - Centre for International Studies on Economic Growth (CEIS)

Francesca Diluiso

University of Rome Tor Vergata - Department of Economics and Finance

Date Written: December 18, 2017

Abstract

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

Suggested Citation

Annicchiarico, Barbara and Diluiso, Francesca, International Transmission of the Business Cycle and Environmental Policy (December 18, 2017). CEIS Working Paper No. 423. Available at SSRN: https://ssrn.com/abstract=3089914 or http://dx.doi.org/10.2139/ssrn.3089914

Barbara Annicchiarico (Contact Author)

University of Rome, Tor Vergata - Department of Economics and Finance ( email )

Rome, I-00133
Italy

University of Rome Tor Vergata - Centre for International Studies on Economic Growth (CEIS) ( email )

Via Columbia, 2
Rome, I-00133
Italy

Francesca Diluiso

University of Rome Tor Vergata - Department of Economics and Finance ( email )

Rome
Italy

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