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CREDIT MARKETS AND INVESTMENT IN RENEWABLE ENERGY UNDER UNCERTAINTY

Published online by Cambridge University Press:  14 September 2016

Alexandra Vinogradova
Alexandra Vinogradova*
Affiliation:
Center of Economic Research, ETH Zurich
*
Address correspondence to: Alexandra Vinogradova, Center of Economic Research, CER-ETH, Zurich, Switzerland; e-mail: [email protected].
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Abstract

The present study examines the problem facing a resource-importing economy seeking to achieve energy independence by developing a renewable substitute. The invention of the substitute is assumed to follow a stochastic process that can be influenced by investment in energy research and development. I analyze the optimal investment strategy under alternative assumptions with respect to the economy's access to international financial markets, the terms on which credit is available, and the country's degree of dependence on resource imports. It is found that, in general, having access to capital markets does not necessarily lead to a higher investment rate. However, in the empirically relevant range of elasticity of intertemporal consumption substitution, the economy with access to credit invests more than under financial autarky. A higher degree of dependence on resource imports implies a lower optimal investment. Arrival of the substitute does not necessarily cause an immediate improvement in the net foreign asset position but may in fact cause its further deterioration.

Keywords

Nonrenewable ResourceCapital MarketUncertaintyBackstop
Type
Articles
Information
Macroeconomic Dynamics , Volume 21 , Issue 6 , September 2017 , pp. 1252 - 1276
Copyright
Copyright © Cambridge University Press 2016 

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