Climate Change and the Chinese Economy, Three Essays on Macroeconomic Model

The PhD thesis, “Climate Change and the Chinese Economy: Three Essays on Macroeconomic Models,” presents three macroeconomic models to study the Chinese economy in addressing climate change and social imbalances. The first essay, “Modelling the Green Transition of the Chinese Economy,” develops a stock-flow consistent (SFC) macroeconomic model with an energy sector for China to investigate the effects of green policies on the green transition and the economy. We provide an analytical solution for the green transition that illustrates the relative cost of using conventional energy compared to renewable energy, enabling the determination of the optimal share of renewable energy. The development of the energy sector, in turn, promotes the green transition. Our solution also underscores the importance of green policies in facilitating a green transition. We calibrate the model to the National Determined Contributions (NDCs) scenarios from the Network for Greening the Financial System (NGFS) and run simulations from 2019 to 2035. The results indicate that carbon taxes stimulate the green transition but harm the economy, resulting in reduced economic growth, a current account deficit, and increased inflation. Carbon taxes deteriorate firms‘ balance sheets. Governments benefit from carbon taxes in the short term but face a higher public debt-to-GDP ratio in the long term. Carbon taxes reduce carbon intensity and carbon emissions. We also compared the effect of green fiscal policy to conventional fiscal policies financed by carbon taxes (carbon rebate). Green subsidies benefit economic growth more effectively. They mitigate inflation caused by carbon taxes and further stimulate the green transition. The second essay, “An Empirical Ecological Stock-Flow Consistent Model of China,” develops an empirical ecological stock-flow consistent model for China. It embeds the Chinese balance sheet and transaction flow matrix and describes institutions’ behaviours to mimic the Chinese economy. By including the material and energy balance, the model can link the economy to its effect on the environment. We use the in-sample prediction to validate the model and find that the data’s fitness is fairly good. We run a baseline scenario under a promised green transition from 2019 to 2035, giving a reference to future predictions. It shows that the green transition alone is insucient to prevent emissions from increasing before 2030 in China (policy target). Then, we compare a reduction in working hours to a wage increase policy and an income redistribution policy. All three policies reduce real GDP, income inequality and emissions. A working hour reduction reduces income equality and unemployment more significantly but may trigger inflation in the short run. A wage increase only shows short-run effects in reducing income inequality and emissions and results in high inflation and more unemployment. A redistribution policy will have a long-lasting negative effect on economic growth, but it reduces income inequality and air emissions more significantly. The last essay, “A Comparison of an Empirical Stock Flow Consistent Model and a New Keynesian Model of China,” develops a New Keynesian model with the same structure as an empirical ecological stock-flow model. We employ the same methodology to estimate the parameters as in an empirical SFC framework, which does not rely on finding a steady state or calibration to data, but instead uses long-term correction and is based purely on regression. This allows us to compare the performance of the two models in terms of fitting the historical data. It shows that the New Keynesian model performs relatively poorly compared to the SFC model because the behaviour equations generated from the optimisation problem are more restricted. Then, we run baseline scenarios for prediction using the two models to compare the economic growth demand-led and supply-led. Lastly, we run a nominal wage increase shock. The baseline scenario shows that supply-led growth is much smoother and mainly driven by capital accumulation. On the contrary, household consumption is the main driver in the SFC model baseline scenario. Real GDP in the New Keynesian model exhibits a similar response to a positive nominal wage shock as the SFC model, but causes more unemployment due to the substitution effect between capital and labour. Unlike the results from the SFC model, a nominal wage increase may worsen income inequality and lead to increased air emissions in the New Keynesian model.