Environmental quality along the process of economic growth: a theoretical reappraisal

This paper studies the dual interaction between economic growth and environmental quality in an endogenous growth model. We exhibit multiple equilibria and complex local and global dynamics, resulting in potential indeterminacy, hysteresis effects, or long-lasting growth and environmental cycles. From a policy perspective, we reveal that changes in the environmental policy should be handled with care, as they may generate aggregate instability or condemn the economy to an environmental poverty trap associated with a possible irreversibility of environmental degradation. Lastly, our analysis provides a reassessment of pollution taxes, which are found to improve long-run economic growth when the model is well-determined, but reduce it in the presence of indeterminacy.