A Dynamic Macroeconomic Model with Endogenous Energy-Sector Policies: Constrained-Optimal and Political-Economy-Constrained Equilibria

This paper presents a dynamic general equilibrium model with energy as both input and consumption goods, with two types of households, one poor and the other non-poor. After characterizing the constrained optimal allocation... [ view full abstract ]

This paper presents a dynamic general equilibrium model with energy as both input and consumption goods, with two types of households, one poor and the other non-poor. After characterizing the constrained optimal allocation with commitment (Ramsey problem) the paper introduces policy makers that compete in elections. The paper provides a closed-form solution for the Ramsey problem, a novel formal result not found in the available literature. Under electoral competition, the politico-economic equilibrium implies very different expressions for energy-consumption subsidy rates. With deterministic fundamentals it is shown that long-run growth is possible under both policy-making decision environments, but a necessary condition is a constant growth rate of the international price of the main exhaustible resource used in the production of traditional energy.