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The role of capital and labour in shaping the environmental effects of fiscal stimulus

Krajewski, Piotr, Mackiewicz, Michał
Journal of cleaner production 2019 v.216 pp. 323-332
capital, environmental impact, fiscal policy, greenhouse gas emissions, labor, macroeconomics, models, production economics
Although the macroeconomic consequences of short-term fiscal stimulation packages have been thoroughly analysed in the literature, still relatively little is known about their environmental effects. We discuss an important channel through which short-run expansionary fiscal policy influences greenhouse gas emissions. We show that fiscal policy exerts its impact not only by increasing general level of economic activity, but also by changing the composition of factors of production – capital and labour. Using the dynamic stochastic general equilibrium model of economy, we demonstrate that fiscal expansion results in a shift from capital-intensive to more labour-intensive technologies. Our panel study proves that the latter tends to be associated with lower emissions of greenhouse gases per unit of production. Hence, our analysis demonstrates that an extensive use of fiscal stimulus during recessions can significantly reduce the environmental burden of the additional units of GDP.