Large scale, multi-sector DSGE model as a climate policy assessment tool

Tags: working_papers, structural_modeling, publications_from_2010

Publication date: 27.07.2010

We assess the macroeconomic impact on Polish economy of the diversified package of about 120 different GHG mitigation levers, which were identified in the bottom-up sectoral analysis. For this purpose, we constructed a large scale, multi-sector dynamic stochastic general equilibrium (DSGE) model of Polish economy. Despite its size (compared to most of the other models in this class) our model has been directly calibrated on the latest statistical data for Poland and the EU. This applies both with respect to the calibration of its steady-state and dynamic properties. In the second stage, we focused on empirical moments and among them on relative standard deviations and inter-variable correlation structure, as those two aspects are of primary importance for model's predictive quality. We managed to adjust our model to dynamic properties of the data with only few macroeconomic shocks. In our opinion, this means an important step forward as compared to the other large scale DSGE models like seminal Smets-Wouters one. Good empirical properties of our model justify its application as a macroeconomic policy assessment tool in medium and long term horizon. In contrast to the traditional CGE approach, DSGE modeling enables us to analyze full dynamic,  year-by-year, macroeconomic response to the GHG abatement policies over the entire 2010-2030 period. We present conditional macroeconomic projections of the entire abatement package as well as its decomposition into several major subgroups including: investments in energy capacity (fuel switch), industry or agriculture interventions, and energy and fuel efficiency improvements. We considered alternative government tax and expenditure closures in order to compare the macroeconomic results depending on the fiscal policy measures. This allowed us to construct detailed macroeconomic versions of marginal abatement curves which show the macroeconomic effects related to carbon abatement for Poland's economy for every individual levers and the package as a whole.

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