The internalization of natural capital depreciation in a selected macroeconomic model: Implications for short-run analysis

Abstract

The acknowledgement that nature displays the properties of a capital good, in that it provides a flow of services and depreciates with use, has been neglected in macroeconomics until recently. As a starting premise, the study highlights a measurement problem in gross investment when the depreciation in natural capital is unaccounted for, and traces the consequences of the omission in relation to the investment-savings paradigm that characterizes the goods market. An outcome of internalizing natural capital depreciation is a higher level of nominal interest rate, which is interpreted as the opportunity cost of using manufactured and natural capital resources. The short-run responses of key variables to a policy rule on environmental restoration are then traced using the Keynesian general equilibrium model. Finally, a methodology is developed to empirically demonstrate the conceptual premises of the model with reference to the Canadian economy and the results of the simulations are presented in the thesis.