The EIRIN Flow-of-funds Behavioural Model of Green Fiscal Policies and Green Sovereign Bonds

- Introduce the EIRIN flow-of-funds behavioural model.
- Simulate the introduction of green fiscal policies vis a vis green sovereign bonds on green growth and credit market stability.
- Analyse distributive effects of green fiscal policies and green sovereign bonds on income inequality and wealth concentration, and their feedbacks on the real economy.
- Endogenize green technology investments and display their effects on the green economy (green jobs, investments, goods).
- Model the effect of resource intensive production on the real economy and the bank.

Fiscal and monetary policies, as well as new financial instruments, could play a key role to meet the Paris Agreement. However, deep uncertainty characterizes their design and their potential effects on growth, financial and credit market stability, and inequality. We develop the EIRIN flow-of-funds behavioural model to simulate the introduction of green fiscal policies and green sovereign bonds, and we display their effects on firms' investments in the brown and green sector, on unemployment, on the credit and bonds market. EIRIN is Stock-Flow Consistent and is rooted on a balance sheet approach. It adopts a Leontief production function with no substitution of the production factors, i.e., Labour, Capital, and Raw Materials. Its sectors are endowed with adaptive behaviours and expectations, and interact with the others and the foreign sector through a set of markets. Simulations show that green public policies can promote green growth by influencing firms' expectations and the credit market. Green sovereign bonds represent a short-term win-win solution, while green fiscal measures have higher immediate distributive effects that induce negative feedbacks on the economy. These results are influenced by the conditions (fiscal, budgetary and public debt/GDP) in which both measures are implemented.