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The green metamorphosis of a small open economy

Author

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  • Airaudo, Florencia
  • Pappa, Evi
  • Seoane, Hernan D.

Abstract

We design a small open economy model where production combines energy and traditional factors with low short run substitutability and efficient technology adoption. We study green transitional dynamics. Permanent increases in brown energy prices induce a green transition with short run inflation and persistent output losses. Fiscal policy impacts the transition. Brown energy taxes are inflationary and crowd out brown energy use in favor of green energy. Green public investment or green subsidies have moderate macroeconomic effects, but do not crowd out brown energy use. We discuss fiscal costs and evaluate welfare along the green transition using different metrics.

Suggested Citation

  • Airaudo, Florencia & Pappa, Evi & Seoane, Hernan D., 2023. "The green metamorphosis of a small open economy," CEPR Discussion Papers 17863, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:17863
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    Cited by:

    1. is not listed on IDEAS
    2. Jean-Guillaume Sahuc & Gauthier Vermandel & Frank Smets, 2024. "The New Keynesian Climate Model," Working papers 977, Banque de France.
    3. Guido Ascari & Andrea Colciago & Timo Haber & Stefan Wöhrmüller, 2025. "Inequality along the European green transition," Working Papers 830, DNB.
    4. Hensel, Jannik & Mangiante, Giacomo & Moretti, Luca, 2024. "Carbon pricing and inflation expectations: Evidence from France," Journal of Monetary Economics, Elsevier, vol. 147(C).
    5. Frankovic, Ivan & Kolb, Benedikt, 2024. "The role of emission disclosure for the low-carbon transition," European Economic Review, Elsevier, vol. 167(C).
    6. Carattini, Stefano & Kim, Giseong & Melkadze, Givi & Pommeret, Aude, 2024. "Carbon taxes and tariffs, financial frictions, and international spillovers," European Economic Review, Elsevier, vol. 170(C).
    7. Anton Nakov & Carlos Thomas, 2023. "Climate-conscious monetary policy," Working Papers 2334, Banco de España.
    8. Mar Delgado-Téllez & Javier Quintana & Daniel Santabárbara, 2025. "Carbon pricing, border adjustment and renewable energy investment: a network approach," Working Papers 2506, Banco de España.
    9. Garcia-Villegas, Salomon & Martorell, Enric, 2024. "Climate transition risk and the role of bank capital requirements," Economic Modelling, Elsevier, vol. 135(C).
    10. Matthias Burgert & Giulio Cornelli & Burcu Erik & Benoit Mojon & Daniel Rees & Matthias Rottner, 2025. "The BIS multisector model: a multi-country environment for macroeconomic analysis," BIS Working Papers 1297, Bank for International Settlements.

    More about this item

    Keywords

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    JEL classification:

    • O44 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Environment and Growth
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation

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