Optimal Fiscal Policy in a Second-Best Climate Economy Model with Heterogeneous Agents

A Macro Study of the Unequal Effects of Climate Change

“…Much of this literature focuses on region-level inequality and studies how the consequences of climate change vary across regions based on differences in regional income and climate damages (Nordhaus and Yang, 1996;Carleton et al, 2022;Nath, 2022;Krusell and Smith, 2022;Rudik et al, 2022;Cruz and Rossi-Hansberg, 2024;Bilal and Rossi-Hansberg, 2023). A more theoretical literature adds households with different fixed income types to integrated assessment climate-economy models to study the importance of within-region income inequality for optimal climate policy (Dennig et al, 2015;Kornek et al, 2021;Belfiori and Macera, 2022;Douenne et al, 2023). 3 Moving beyond fixed income types, Blanz (2023) extends a standard incomplete markets model of income heterogeneity, as in the present paper, to study the effects of food-price changes caused by climate change in developing countries.…”