A dsge model on climate change, interest rate, and welfare in ghana

Abstract

Given the scientific consensus that climate change is largely anthropogenic, it is essential to understand how human-induced activities are driving the externality of the century. To this effect, using a Dynamic Stochastic General Equilibrium (DSGE) model, this study sought to investigate the impact of economic activities and policies on climate change in Ghana. Despite its low emission levels, Ghana faces substantial climate change impacts, including flooding, earth trembling, and rising sea levels, necessitating immediate investment in sea defenses. The study‘s objectives were to examine the effects of monetary policy on climate change, find the link between environmental policy and climate change, understand the effects of a change in productivity on climate change, and to analyze the welfare implications of interest rate and environmental policy shocks on the average Ghanaian consumer. The findings reveal that changes in interest rates affect climate change through various transmission mechanisms, with lower interest rates leading to increased emissions. Positive environmental policies were found to effectively reduce climate change and improve mitigation efforts by incentivizing green technologies and sustainable industries. However, increased productivity, while economically beneficial, exacerbates climate change due to increased energy use. The study concludes that while positive environmental policy shocks improve consumer welfare, positive monetary policy shocks have the opposite effect, resulting in a 3 percent extra welfare loss compared to the gains from environmental shocks. These findings underscore the need for a balanced approach to economic growth and environmental sustainability in Ghana.