Can environmental taxation stimulate growth? The role of indeterminacy in endogenous growth models with environmental externalities

Abstract

This paper examines the effects of environmental taxation on long-run growth in an infinitely lived representative agent model of endogenous growth with negative pollution externalities. The novelty of this paper lies in its investigation of how the long-run effects of environmental taxes are affected by the possible emergence of indeterminacy of equilibria in Romer's [1986. Increasing returns and long-run growth. Journal of Political Economy 94, 1002–1037] learning-by-doing model with endogenous labor supply. The analysis shows that environmental taxation generally enhances (harms) long-run growth when the balanced growth path is indeterminate (determinate).