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Financial and fiscal environmental regulation in a credit cycle model

Author

Listed:
  • Ingrid Kubin

    (Vienna University of Economics and Business)

  • Thomas O. Zoerner

    (Oesterreichische Nationalbank)

Abstract

We augment an overlapping generations endogenous credit cycle model with an environmental sector and study the interplay between fiscal and financial environmental regulation, which ultimately affects environmental quality, macroeconomic stability, and income distribution. We define environmental quality as the amount of pollution emitted, which can be regulated either by financial constraints on polluting projects (environmental haircuts) or by tax-financed investment in abatement and improvement technologies. We find that environmental haircuts and environmental taxes each affect emissions and income distribution in unique ways, with interaction effects that reveal trade-offs between economic stability, income, and environmental outcomes. Compared to scenarios in which only financial regulations are implemented, the introduction of a supplementary environmental tax on emissions maintains similar environmental standards, but leads to higher total income and capital per worker. However, this shift in income distribution favors green investors, while the older generation, which relies more on capital income, may experience an overall decrease in net income.

Suggested Citation

  • Ingrid Kubin & Thomas O. Zoerner, 2024. "Financial and fiscal environmental regulation in a credit cycle model," Department of Economics Working Papers wuwp373, Vienna University of Economics and Business, Department of Economics.
    • Handle: RePEc:wiw:wiwwuw:wuwp373
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    References listed on IDEAS

    as
    1. Marco Raberto & Bulent Ozel & Linda Ponta & Andrea Teglio & Silvano Cincotti, 2019. "From financial instability to green finance: the role of banking and credit market regulation in the Eurace model," Journal of Evolutionary Economics, Springer, vol. 29(1), pages 429-465, March.
    2. ,, 2013. "The good, the bad, and the ugly: An inquiry into the causes and nature of credit cycles," Theoretical Economics, Econometric Society, vol. 8(3), September.
    3. Kubin, Ingrid & Zörner, Thomas O. & Gardini, Laura & Commendatore, Pasquale, 2019. "A credit cycle model with market sentiments," Structural Change and Economic Dynamics, Elsevier, vol. 50(C), pages 159-174.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Green transition; environmental regulation; economic stability; income distribution; nonlinear model;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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