Exploring the macroeconomic fluctuations under different environmental policies in China: A DSGE approach

Abstract

Due to the uncertain effects on economic growth and economic fluctuations caused by environmental policies, the best means of choosing the most appropriate environmental policy remains controversial. In the face of various uncertain economic factors, economic fluctuation is an important criterion for evaluating different environmental policies. Thus, we established an environmental dynamic stochastic general equilibrium model under New Keynesian framework embodying nominal price rigidities, environmental policies, pollutant emissions and real uncertainties with the aim of comparing the impacts of different environmental policies on the macroeconomic fluctuations. The results are as follows. First, the responses indicate that all kinds of environmental policies are counter-cyclical. Emissions intensity policy has the strongest effect on curbing fluctuations. Second, a positive energy efficiency shock will lead to a corresponding increase in energy inputs, which is referred to as the energy rebound effect, as well as a rise in pollutant emissions. Third, an emissions intensity shock will exert greater impacts than environmental tax rate shock and emissions cap shock. Fourth, the lower is the price dispersion the less intermediate goods are needed, and, consequently, the lower are the pollutant emissions. Taken together, the results highlight the policy implications associated with choosing an environmental policy.