Abstract

We introduce an environmental dimension into a real-business-cycle
model augmented with a detailed government sector. We calibrate the
model to Bulgarian data for the period following the introduction of the
currency board arrangement (1999–2016). We investigate the
quantitative importance of utility-enhancing environmental quality, and
the mechanics of an ‘environmental’ output tax levied on the polluting
firm’s output, as well as the effect of government spending on pollution
abatement over the cycle. In particular, a positive shock to pollution
emission in the model works like a positive technological shock, but its
effect is quantitatively very small. Overall, the model performs relatively
well when evaluated against data, but less so along the environmental
dimension, so more research is needed to understand the aggregate
effects of pollution.