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Green Spending Reforms, Growth and Welfare with Endogenous Subjective Discounting

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  • Eugenia Vella

    ()

  • Evangelos Dioikitopoulos

    ()
    (Brunel University)

  • Sarantis Kalyvitis

    ()
    (DIEES, AUEB)

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 towards 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'. Contrary 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.

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Paper provided by Athens University of Economics and Business in its series DEOS Working Papers with number 1335.

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Publication status: Forthcoming in Macroeconomic Dynamics
Handle: RePEc:aue:wpaper:1335

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Keywords: endogenous time preference; growth; environmental quality; second-best fiscal policy;

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