Schumpeter BSoE Macro Seminar

Speaker

Omar Rachedi (Esade Business School/Ramon Llull University)

Abstract:
Changes in public spending may alter greenhouse emissions, and thus modify climate damages. We incorporate these climate effects into the measurement of the fiscal multiplier through what we refer to as the carbon adjustment. Using a 400-sector New Keynesian production network, we quantify how the carbon adjustment varies across sectors, that is, when public spending increases idiosyncratically in a sector at a time. The carbon adjustment depends positively on the social cost of carbon (SCC) and the carbon intensity of the shocked sector. With a 190$ SCC, we find that the carbon adjustment ranges between -$1.12 and $0.08. When considering changes in public spending that replicate the sectoral composition of U.S. government expenditures, the carbon adjustment reduces the fiscal multiplier by $0.08. The carbon adjustment also alters the dynamic transmission of fiscal policy, as it postpone the bulk of the output response to government spending shocks.