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Is Investment in Environmental Quality a Solution to Recessions? Studying the Welfare Effects of Green Animal Spirits

  • Ossama Mikhail

    (University of Central Florida)

  • J. Walter Milon

    (University of Central Florida)

  • Richard Hofler

    (University of Central Florida)

Assume that 'green accounting' has been adopted and implemented, does an investment in environmental quality play a role similar to the investment in capital in towing the economy out of a recession? To answer the question, we integrate 'green accounting' into a stochastic dynamic general equilibrium model to study the short-run consequences of investment in environmental quality and hereby addressing if there is an incentive-based fiscal environmental solution to recessions. Surprisingly and counter intuitive, we found that reducing the rate at which humans consume the environment renders a fiscal policy - that engage in environmental investment - less effective in providing a thrust out of a recession. Conditional on the proposed model and the calibrated parameters, we conclude that an increase of one percent in environmental investment will crowd out real quarterly consumption in a range from $ 102.74 billions to $ 171.11 billions, on average, in every quarter for seven years following the investment (measured in chained 2000 dollars). Therefore, we argue that investment in environmental quality is not a solution to recessions. This result is a striking contrast to the conclusion reached in Weitzman and Löfgren (1997, Journal of Environmental Economics and Management, 32 (2), 139-153).

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Paper provided by EconWPA in its series Others with number 0510010.

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Length: 31 pages
Date of creation: 18 Oct 2005
Date of revision:
Handle: RePEc:wpa:wuwpot:0510010
Note: Type of Document - pdf; pages: 31
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