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GREEN SPENDING REFORMS, GROWTH, AND WELFARE WITH ENDOGENOUS SUBJECTIVE DISCOUNTING

Published online by Cambridge University Press:  02 April 2014

Eugenia Vella ,
Evangelos V. Dioikitopoulos  and
Sarantis Kalyvitis
Eugenia Vella
Affiliation:
European University Institute
Evangelos V. Dioikitopoulos*
Affiliation:
Brunel University
Sarantis Kalyvitis
Affiliation:
Athens University of Economics and Business
*
Address correspondence to: Evangelos V. Dioikitopoulos, Department of Economics and Finance, Brunel University, Uxbridge UB8 3PH, UK; e-mail: [email protected].
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Abstract

This paper studies optimal fiscal policy, in the form of taxation and the allocation of tax revenues between infrastructure and environmental investment, in a general-equilibrium growth model with endogenous subjective discounting. A green spending reform, defined as a reallocation of government expenditures toward the environment, can procure a double dividend by raising growth and improving environmental conditions, although the environment does not impact the production technology. Also, endogenous Ramsey fiscal policy eliminates the possibility of an “environmental and economic poverty trap.” In contrast to the case of exogenous discounting, green spending reforms are the optimal response of the Ramsey government to a rise in the agents' environmental concerns.

Keywords

Endogenous Time PreferenceGrowthEnvironmental QualitySecond-Best Fiscal Policy
Type
Articles
Information
Macroeconomic Dynamics , Volume 19 , Special Issue 6: Growth, Optimal Fiscal and Monetary Policy, and Financial Frictions , September 2015 , pp. 1240 - 1260
Copyright
Copyright © Cambridge University Press 2014 

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