Greta Thunberg effect and Business Cycle Dynamics: A DSGE model

The increasing concerns for the future effects of global warming have given rise to an unprecedented wave of environmental activism. This paper studies how this call for stronger climate actions could influence macroeconomic dynamics. We explore this topic, employing a Dynamic Stochastic General Equilibrium (DSGE) model extended to consider two classes of goods (i.e., Green and Dirty), variable green preferences, and a "Greta Thunberg" shock affecting consumers' sustainable attitudes. We find that: (i) environmental awareness plays a key role in reducing carbon emissions and green preferences; (ii) Greta Thunberg effect slows down aggregate output and investment; (iii) a green preference shock contributes to around 15 and 29 % of consumption, investment, and labor volatilities at the aggregate level.