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Taxing Fossil Fuels under Speculative Storage

Listed author(s):
  • Semih Tumen
  • Deren Unalmis
  • Ibrahim Unalmis
  • Filiz D Unsal

This paper investigates the mechanisms through which environmental taxes on fossil fuel usage can affect the main macroeconomic variables in the short-run. We concentrate on a particular mechanism: speculative storage. The existence of forward-looking speculators in the model improves the effectiveness of tax policies in reducing fossil fuel usage. Improved policy effectiveness, however, is costly: it drives inflation and interest rates up, while impeding output. Based on this tradeoff, we seek an answer to the question how monetary policy should interact with environmental tax policies in our DSGE model of fossil fuel storage.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 14/228.

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Length: 36
Date of creation: 18 Dec 2014
Handle: RePEc:imf:imfwpa:14/228
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