Transitional impacts of environmental policy in an endogenous growth model

To explore the link between a tighter environmental policy and economic growth, we employ an endogenous growth model with endogenous technological progress in abatement technologies. The environment, which is modelled as a renewable resource, acts both as a public consumption good and as a public input into production. The entire transition towards a new balanced-growth path after a tightening of environmental policy is computed analytically. We find sharp contrasts between short-run and long-run effects. Whereas the level and the growth rate of output may decline in the short run, income growth may improve in the long run.