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Dark Clouds or Silver Linings? Knightian Uncertainty and Climate Change

  • Michael Funke

    ()

  • Yu-Fu Chen

    ()

  • Nicole Glanemann

    ()

This paper examines the impact of Knightian uncertainty upon optimal climate policy through the prism of a continuous-time real option modelling framework. We analytically determine optimal intertemporal climate policies under ambiguity. Additionally, numerical simulations are provided to illustrate the properties of the model. The results indicate that increasing Knightian uncertainty accelerates climate policy, i.e. policymakers become more reluctant to postpone the timing of climate policies into the future.

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File URL: http://www.uni-hamburg.de/fachbereiche-einrichtungen/fb03/iwwt/makro/Knightian.pdf
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Paper provided by Hamburg University, Department of Economics in its series Quantitative Macroeconomics Working Papers with number 21107.

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Date of creation: Jul 2011
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Handle: RePEc:ham:qmwops:21107
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