Contemporary Finance & Economics ›› 2025, Vol. 0 ›› Issue (7): 16-29.

• Theoretical Economics • Previous Articles     Next Articles

Analysis of China’s Economic Fluctuations and Stabilization Policies under Environmental Regulations

Chen Li-feng   

  1. Party School of Guangdong CPC, Guangzhou 510053, China
  • Received:2024-05-02 Revised:2024-06-28 Online:2025-07-15 Published:2025-07-22

Abstract: Previous studies have regarded environmental regulation as a“job killer”in terms of its impact on employment and economic cycle fluctuations. By constructing a dynamic stochastic general equilibrium model that includes environmental pollution, environmental protection, and labor market friction, and considering the destructive effects of environmental pollution on production, the impact of environmental regulations on the labor market and macroeconomy can be examined. Based on the calibration of model parameters, the results of the second-order moment matching indicate that the dynamic stochastic general equilibrium model that takes into consideration the destructive effects of environmental pollution on production can fit the real data in China well. The impulse response analysis of the impact of environmental taxes shows that the reverse shock caused by the increase in environmental tax rates leads to a tightening of the labor market, and the increase in environmental tax rates exacerbates macroeconomic fluctuations. However, if the government uses environmental taxes as employment subsidies for enterprises, it will help alleviate the labor market tightening and macroeconomic fluctuations caused by the imposition of environmental taxes, thereby reducing the cost of smoothing the economic cycle for the government. The simulation results of stabilizing monetary policy design show that environmental policies have significantly changed the implementation effect of monetary policy, and this change has a particularly significant impact on unemployment. The results of social welfare analysis indicate that, while regulating the environment, the policy combination of monetary policy mechanisms targeting unemployment and employment subsidies has the effect of balancing environmental protection, employment, and macroeconomic stability.

Key words: environment regulation, employment subsidy, labor market, macroeconomic fluctuations, monetary policy

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