Abstract
AbstractWe study the link among economic growth, renewable natural resources and environmental policy. The context is a general equilibrium model of endogenous growth and environmental policy. We examine the conditions under which sustainable growth is both feasible and optimal, where the latter takes the form of second‐best optimal environmental Ramsey policies. We also investigate the conditions for an inverted U‐shaped relation between environmental policies and sustainable growth. We show that the combination of environmental production externalities and second‐best optimal Ramsey policies can lead to both local and global indeterminacy. The introduction of environmental policy, although well‐intentioned and designed to correct for market inefficiencies, triggers an expectations coordination problem; thereby differences in environmental quality and economic growth can be explained among countries with the same fundamentals.
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