DP 0247 - Deforestation and Environmental Policy: a DSGE approach

Rodrigo Mendes Pereira, Geraldo Sandoval Góes/ Rio de Janeiro, november 2019

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This paper proposes an environmental DSGE model with deforestation of a tropical rain forest. The forest can be used to produce goods, but it also affects the well-being of the representative individual. Environmental policy is implemented with the taxation of the deforestation activity. We calibrate the model for the Brazilian economy, and show that it predicts a procyclical deforestation, and that a more stringent policy reduces the volatility of deforestation. Moreover, technological progress decreases the stock of forest, and it does so more intensely with a lenient environmental policy.

Keywords: deforestation; real business cycle; environmental policy; DSGE.