Omar Rachedi, Esade Business School

"The Carbon-Adjusted Fiscal Multiplier"

Abstract

Public spending affects not only output but also greenhouse gas emissions, thereby influencing the environment. To this end, we extend the concept of the fiscal multiplier by introducing the carbon adjustment: the dollar value of climate damages incurred per dollar of public spending. We offer a quantitative illustration of this channel through a multi-sector New Keynesian model with an environmental block and sectoral heterogeneity in carbon intensity. The carbon adjustment of government consumption is negative, ranging between -7 and -19 cents, and even more so for high values of the social cost of carbon and sectors’ carbon intensity. 

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Contact person: Brigitte Hochmuth