Sustainable Growth: Modelling, Issues and Policies

Nyambuu, U., Palokangas, T., & Semmler, W. (2014). Sustainable Growth: Modelling, Issues and Policies. IIASA Interim Report. IIASA, Laxenburg, Austria: IR-14-019

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Abstract

This document is a literature review of sustainable growth. Because there are many definitions of sustainable growth, we use the following one that is very common in economics. Economic growth is 'sustainable', if it meets the needs of the present generations without compromising the ability of future generations to meet their own needs. This concerns both the availability of resources for future generations and the environmental impacts of current decisions on future activities.

Section I, we consider issues and policy measures related to the resource problem. We introduce dynamic models in which exhaustible resources are used in production and apply them to several cases: an open economy, a backstop technology and the relationship of climate and economic growth. We also examine a transition of dirty to clean technology and the consequences of this to public finance and intergenerational equity.

In Section II, we consider macroeconomic performance with natural resources: origins and effects of resource abundance, patterns of development for world prices, resource depletion, peak production, "Dutch disease" and external debt. If economic growth affects environment, then the abatement of environmental damages must be included into the discussion of sustainable economic growth.

In Section III, we present resource extraction and the environmental impacts of economic activities in the context of multiple decision makers. This introduces strategic interactions of agents, e.g. firms, households and nations. We consider collusion as well as Cournot, Bertrand games and discuss on diverse micro and macro policies that consider incentive compatibility.

In the Appendix, we introduce a finite horizon procedure called Nonlinear Model Predictive Control (NMC) by which the models presented in this survey can be numerically solved.

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