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Evaluating the carbon-macroeconomy relationship: Evidence from threshold vector error-correction and Markov-switching VAR models

Chevallier, Julien (2011), Evaluating the carbon-macroeconomy relationship: Evidence from threshold vector error-correction and Markov-switching VAR models, Economic Modelling, 28, 6, p. 2634-2656. http://dx.doi.org/10.1016/j.econmod.2011.08.003

Type
Article accepté pour publication ou publié
Date
2011-11
Journal name
Economic Modelling
Volume
28
Number
6
Publisher
Elsevier
Pages
2634-2656
Publication identifier
http://dx.doi.org/10.1016/j.econmod.2011.08.003
Metadata
Show full item record
Author(s)
Chevallier, Julien
Abstract (EN)
This paper studies the nonlinear adjustment between industrial production and carbon prices – coined as ‘the carbon-macroeconomy relationship’ – in the EU 27. We model carbon price returns and industrial production as nonlinear and state-dependent, with dynamics depending on the sign and magnitude of past realization of returns and the growth of industrial production. Our findings show that (i) macroeconomic activity is likely to affect carbon prices with a lag, due to the specific institutional constraints of this environmental market; (ii) the joint dynamics of industrial production and carbon prices seem adequately captured by two-regime threshold vector error-correction and two-regime Markov-switching VAR models compared to linear models as main competitors. The regime-switching models proposed are profoundly checked for their economic content and statistical congruency, and are found to provide a sound statistical framework for a comprehensive analysis of the carbon-macroeconomy relationship.
Subjects / Keywords
Carbon price; Industrial production; Cointegration; Threshold cointegration test; Threshold vector error-correction; VAR; Markov-switching VAR
JEL
C01 - Econometrics
C32 - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
C52 - Model Evaluation, Validation, and Selection
E23 - Production
E32 - Business Fluctuations; Cycles
G12 - Asset Pricing; Trading Volume; Bond Interest Rates
G15 - International Financial Markets
Q43 - Energy and the Macroeconomy
Q47 - Energy Forecasting
Q54 - Climate; Natural Disasters and Their Management; Global Warming

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