Effects of Macroeconomic Policy on Air Quality: Evidence from the US

This paper examines the effect of economic policy on air quality using US quarterly data from 1973 to 2013. In particular, we analyze the short-run as well as the long-run interactions between fiscal and monetary policy with CO2 emissions, employing time series techniques of co-integration, Granger multivariate causality and vector error-correction modeling. To take into account possible variations of the effect of economic policy according to the sources of pollution, we distinguish between industrial and residential inflicted CO2 emissions. In addition, we construct the impulse responses to three linear combinations of fiscal shocks, corresponding to the three scenarios of deficit-spending, deficit-financed tax cuts and a balanced budget spending expansion. Policy implications from the results vary depending on the source of CO2 emissions.