A Hybrid System Dynamics Agent Based Model to Assess the Role of Green Fiscal and Monetary Policies

Abstract

To achieve the goal of the Paris Climate agreements, i.e. to limit global temperature increases to as close to 2 deg C above preindustrial levels as possible, the role of fiscal instruments is potentially very important. A global carbon tax, while not likely politically, would be one such instrument. There is great uncertainty about the design of a green financial architecture and the effects of a carbon tax on growth, financial stability and inequality. In this paper, we propose the eIRIN System Dynamics model with heterogeneous agents as a tool to simulate green fiscal and targeted monetary policies, displaying their effects on firms’ investments, unemployment, wages, credit market and economic growth. Rooted in a balance sheet approach, the stock-flow model is characterized by heterogeneous agents and sectors that interact through a set of markets. The production function is based on a Leontief function with no substitution of the three production factors (Labour, Capital, and Raw Materials). Simulations show that a green scenario based on the introduction of green sovereign bonds would benefit the real economy (in terms of unemployment and capital) and contribute to financial stability, as a difference from a green scenario based on the introduction of a carbon tax. Also, the green bonds scenario performs better than the business as usual, resource-intensive scenario.