Macroeconomic Impacts of Carbon Dioxide Emission Shocks and Contemporaneous Feedback Effects: A Post-Keynesian Analysis

Abstract

This paper attempts to analyze the dynamic effect of carbon dioxide emission on key macroeconomic variables of Australia, China and Japan for the period of 1980 to 2008. A Kaleckian-Post-Keynesian multi-sectoral open economy model, which is augmented by a demand driven labour market, a reserve army effect in the Marxian sense and technological change is being utilized and econometric long run relationship between variables are investigated. The paper mainly focuses on the link between carbon emission and sources of economic development such as investment, saving, income distribution and labor market fluctuations. By employing the Structural vector autoregressive (SVAR) approach, the paper investigates that if there is a cointegrating relationship between the variables in selected countries by imposing short and long-run restriction on SVAR model. The short run restrictions impose contemporaneous feedback effects among the real sector variables and CO2 following the methodology described in Bernanke (1986), Blanchard and Watson (1986), and Sims (1986), and the long run restrictions in SVAR approach is an alternative to cointegration for capturing long-run equilibrium relationships. In this study we assume that economy faces exogenous, random positive and/or negative shocks to CO₂ emission levels, which can have substantial impact on key macroeconomic indicators, then the main intention is to examine whether key macroeconomic indicators differ significantly in their responses to shocks (unexpected variation) of carbon dioxide emission in the medium term to long run.