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The green metamorphosis of a small open economy

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  • Airaudo, Florencia
  • Pappa, Evi
  • Seoane, Hernan D.

Abstract

We design a small open economy model where production combines energy and traditional factors with low short run substitutability and efficient technology adoption. We study green transitional dynamics. Permanent increases in brown energy prices induce a green transition with short run inflation and persistent output losses. Fiscal policy impacts the transition. Brown energy taxes are inflationary and crowd out brown energy use in favor of green energy. Green public investment or green subsidies have moderate macroeconomic effects, but do not crowd out brown energy use. We discuss fiscal costs and evaluate welfare along the green transition using different metrics.

Suggested Citation

  • Airaudo, Florencia & Pappa, Evi & Seoane, Hernan D., 2023. "The green metamorphosis of a small open economy," CEPR Discussion Papers 17863, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:17863
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    8. Stefano Carattini & Garth Heutel & Givi Melkadze, 2023. "Climate Policy, Financial Frictions, and Transition Risk," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 778-794, December.
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    Cited by:

    1. Jannik Hensel & Giacomo Mangiante & Luca Moretti, 2023. "Carbon Pricing and Inflation Expectations: Evidence from France," CESifo Working Paper Series 10552, CESifo.
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    3. Garcia-Villegas, Salomon & Martorell, Enric, 2024. "Climate transition risk and the role of bank capital requirements," Economic Modelling, Elsevier, vol. 135(C).

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    More about this item

    Keywords

    Transitional dynamics;

    JEL classification:

    • O44 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Environment and Growth
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation

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