Abstract:

Directing technical change while avoiding massive over-indebtedness is at the heart of many discussions to ensure a viable ecological transition. In this paper, we develop an extension of the model [Grasselli and Costa Lima, 2012] in a simple case with only two natures of capital, in a stock-flow consistent nonlinear dynamic. We study the multiple long-run equilibria and their local asymptotic stability and identify conditions under which the transition can be implemented without leading to an overhang of debt. The inertia affecting the transition of aggregate investment from one type of capital to the other turns out to destabilize the debt-deflationary equilibria of the dynamics. Finally, our analysis pinpoints two main levers for a government intervention: increasing the energy price (say, through a carbon tax) or the output-to-capital ratio of clean capital.

Keywords: socio-ecological transition, macroeconomic imbalances, sustainable growth, stock-flow coherence, putty-clay, investment irreversibility