Fiscal, environmental, and bank regulation policies in a small open economy for the green transition

Abstract

This study develops a small open economy dynamic stochastic general equilibrium model with green and brown intermediate goods, banks subject to capital requirements, and public investment. The model is used to analyze which environmental, fiscal, and bank regulation policies are effective facilitators of the domestic economy’s green transition. Among the policies and structural changes that can generate an exogenously imposed and fixed emissions reduction, most costly is the exogenous world brown energy price increase, followed by the introduction of an emissions cap, while the introduction of domestic carbon taxes leads to the smallest decrease of GDP in the long run. Bank regulation policies are not capable of generating large emissions reductions, while fiscal policies can only generate smaller emissions reductions at higher costs than the aforementioned policies.