Hiep Nguyen: Essays on Environmental and Monetary Policy

Abstract

Essay I: This paper examines the impact of environmental policy in the form of emissions trading on income inequality in an endogenous growth model, an area that has received less attention thus far. We integrate pollution and environmental policy into a Schumpeterian growth framework to establish a theoretical relationship between the stringency of environmental policy and income inequality. Our analysis reveals that the nexus varies depending on the elasticity of labor supply. Specifically, a stricter environmental policy in the form of a lower cap for pollution permits increases income inequality when labor supply is inelastic. In the case of elastic labor supply, the relationship between environmental policy and income inequality becomes more involved and depends on parameter values. We show that a stricter environmental policy decreases income inequality under a reasonable calibration. 

Essay II: This study incorporates pollution and environmental policy into an endogenous growth framework to evaluate the impact of environmental policy in the form of emissions trading on the economic takeoff of an economy. We find that a stricter environmental policy with a lower cap for pollution permits delays industrialization and decreases the economic growth rate along the transition path, but it does not affect long-run economic growth. Finally, we calibrate the model to current underdeveloped countries to examine whether the trade-off between environmental preservation and early industrialization is substantial for these countries. Due to their sufficiently high population growth, underdeveloped countries can safeguard the environment, notwithstanding a mere delay of a few years in the industrialization process. 

Essay III (with Hanfeng Chen and Matthias Hänsel): Interest rates on new central bank digital currencies (CBDCs) can be expected to enter the monetary policy toolkit soon. Using an extended Sidrauski (1967) model featuring an oligopsonistic banking sector, we study the complex transmission of interest rates on CBDC, which generally involves both direct and indirect effects. This is because a CBDC rate cut not only affects the rate on the CBDC itself, but also induces non-competitive deposit providers to adjust their spreads, as the new substitute for their products becomes relatively less attractive. A calibration exercise suggests that the indirect effects depend strongly on the sources of deposit market power: If driven by high concentration, they substantially amplify the aggregate effects of the CBDC policy rate, both in response to transitory shocks as well as regarding its long-run welfare effects.