Evaluating the carbon-macroeconomy relationship: Evidence from threshold vector error-correction and Markov-switching VAR models
AbstractThis paper studies the nonlinear adjustment between industrial production and carbon prices – coined as ‘the carbon-macroeconomy relationship’ – in the EU 27. We model carbon price returns and industrial production as nonlinear and state-dependent, with dynamics depending on the sign and magnitude of past realization of returns and the growth of industrial production. Our findings show that (i) macroeconomic activity is likely to affect carbon prices with a lag, due to the specific institutional constraints of this environmental market; (ii) the joint dynamics of industrial production and carbon prices seem adequately captured by two-regime threshold vector error-correction and two-regime Markov-switching VAR models compared to linear models as main competitors. The regime-switching models proposed are profoundly checked for their economic content and statistical congruency, and are found to provide a sound statistical framework for a comprehensive analysis of the carbon-macroeconomy relationship.
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Bibliographic InfoArticle provided by Elsevier in its journal Economic Modelling.
Volume (Year): 28 (2011)
Issue (Month): 6 ()
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Web page: http://www.elsevier.com/locate/inca/30411
Carbon price; Industrial production; Cointegration; Threshold cointegration test; Threshold vector error-correction; VAR; Markov-switching VAR;
Find related papers by JEL classification:
- C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- E23 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Production
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
- Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting
- Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters
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- Vicente Esteve & Cecilio Tamarit, 2011.
"Threshold cointegration and nonlinear adjustment between CO2 and income: the environmental Kuznets curve in Spain, 1857-2007,"
1106, Department of Applied Economics II, Universidad de Valencia.
- Esteve, Vicente & Tamarit, Cecilio, 2012. "Threshold cointegration and nonlinear adjustment between CO2 and income: The Environmental Kuznets Curve in Spain, 1857–2007," Energy Economics, Elsevier, vol. 34(6), pages 2148-2156.
- Chevallier, Julien, 2012. "Cointegration between carbon spot and futures prices : from linear to nonlinear modeling," Economics Papers from University Paris Dauphine 123456789/7936, Paris Dauphine University.
- Julien Chevallier, 2012. "Cointegration between carbon spot and futures prices: from linear to nonlinear modeling," Economics Bulletin, AccessEcon, vol. 32(1), pages 160-181.
- repec:ner:dauphi:urn:hdl:123456789/7936 is not listed on IDEAS
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