Working Paper: CEPR ID: DP17863
Authors: Florencia Airaudo; Evi Pappa; Hernan Seoane
Abstract: We design a small open economy model where production combines energy and traditional factors with low short run substitutability and efficient technology adoption. We study green transitional dynamics. Permanent increases in brown energy prices induce a green transition with short run inflation and persistent output losses. Fiscal policy impacts the transition. Brown energy taxes are inflationary and crowd out brown energy use in favor of green energy. Green public investment or green subsidies have moderate macroeconomic effects, but do not crowd out brown energy use. We discuss fiscal costs and evaluate welfare along the green transition using different metrics.
Keywords: Transitional dynamics
JEL Codes: O44; Q48; Q55
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Permanent increases in brown energy prices (Q41) | Green transition (P28) |
| Green transition (P28) | Short-run inflation (E31) |
| Green transition (P28) | Persistent output losses (C41) |
| Higher marginal costs from increased brown energy prices (Q41) | Shift in production towards green energy (Q42) |
| Monetary policy can mitigate inflationary pressures (E52) | Exacerbating output losses (F69) |
| Fiscal policies (carbon taxes) (H39) | Accelerate green transition (Q48) |
| Fiscal policies (carbon taxes) (H39) | Inflationary pressures and output losses (E31) |
| Green public investment and subsidies (H23) | Support the transition without inducing inflationary pressures (E64) |