A Hybrid System Dynamics – Agent Based Model to Assess the Role of Green Fiscal and Monetary Policies
22 Pages Posted: 17 Mar 2016
Date Written: March 15, 2016
Abstract
To achieve the goal of the Paris Climate agreements, i.e. to limit global temperature increases to as close to 2 deg C above preindustrial levels as possible, the role of fiscal instruments is potentially very important. A global carbon tax, while not likely politically, would be one such instrument. There is great uncertainty about the design of a green financial architecture and the effects of a carbon tax on growth, financial stability and inequality. In this paper, we propose the εIRIN System Dynamics model with heterogeneous agents as a tool to simulate green fiscal and targeted monetary policies, displaying their effects on firms’ investments, unemployment, wages, credit market and economic growth. Rooted in a balance sheet approach, the stock-flow model is characterized by heterogeneous agents and sectors that interact through a set of markets. The production function is based on a Leontief function with no substitution of the three production factors (Labour, Capital, and Raw Materials). Simulations show that a green scenario based on the introduction of green sovereign bonds would benefit the real economy (in terms of unemployment and capital) and contribute to financial stability, as a difference from a green scenario based on the introduction of a carbon tax. Also, the green bonds scenario performs better than the business as usual, resource-intensive scenario.
Keywords: System Dynamics, Agent Based Model, green fiscal policies, green bonds, stock-flow consistency, endogenous money
JEL Classification: E12, E17, E50, E24, Q52, Q56
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