Munich Personal RePEc Archive

Environmental Policy and China’s Macroeconomic Dynamics Under Uncertainty---Based on The NK Model with Distortionary Taxation

Xu, Wenli and Xu, Kun and Lu, Hongyou (2016): Environmental Policy and China’s Macroeconomic Dynamics Under Uncertainty---Based on The NK Model with Distortionary Taxation.

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Abstract

This paper, by building a New Keynesian dynamic general equilibrium model that combines with distortionary taxation, pollution decision of firms, and environmental quality evolution under uncertainty, analyzes shocks from markets and taxation policies on macro-economy and environmental quality under different environmental policies circumstance theoretically. Further, parameters are calibrated on the basis of macroeconomic and pollution data from 1978 to 2014 in China as well as results from completed researches of others, and accordingly simulates differentiated response of macro-economy and environment to altering policy circumstance. Empirical results indicate that: (1) carrying out various environmental policies indeed causes economic loss, for which economic costs in average reach 0.1950% with 1% reduction of pollution elimination while change of economic costs (0.11149) under implement of pollution-discharge-permit system; (2) various environment polices play the role as automatic stabilizers for halting aggregate fluctuation, the most magnificently effect of decreasing instability relatively comes from Discharge Permit System in particular; (3) rising obstacles on price transmission lead to decreasing pollution-cut struggle from enterprises and increasing pollution emission; (4) taxation polices play effective roles for encouraging firms to participate on emission-cut activities. Potential suggestions, hence, root in: (1) putting environment regulation into effect fast, in which Discharge Permit police should be dominant and others be complementary; (2) carrying out marketization reforms by removing price intervention and posing fundamental effect of markets; (3) putting leading function of fiscal and taxation polices into effect by realizing green taxation institution.

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