E-DSGE Model With Endogenous Capital Utilization Rate

Published on June 2, 2023

Authored by Maria Teresa Punzi, Ying Tung Chan

To evaluate the quantitative impact of the transmission mechanism, we introduce distinct features to the E-DSGE framework, including endogenous capital utilisation, time-varying depreciation of capital, and environment quality shocks. We find that the complementarity between energy and capital leads to an amplification effect of the conventional transmission mechanism. Our model with these ingredients ranks any carbon tax below 25% as the best policy in terms of welfare improvement.