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Denmark has a highly ambitious goal of reducing greenhouse gas emissions 70 percent below 1990 levels by 2030. While there is general agreement that carbon pricing should be the centerpiece of Denmark’s mitigation strategy, pricing needs to be effective, address equity and leakage concerns, and be reinforced by additional measures at the sectoral level. The strategy Denmark develops can be a good prototype for others to follow. This paper discusses mechanisms to scale up domestic carbon pricing, compensate households, and possibly combine pricing with a border carbon adjustment. It also recommends the use of revenue-neutral feebate schemes to strengthen mitigation incentives, particularly for transportation and agriculture, fisheries and forestry, though these schemes could also be applied more widely.

The COVID-19 lockdowns have brought about the need of large fiscal responses in all European countries. However, countries across Europe are differently equipped to respond to the shock due to differences in economic conditions and fiscal space. In this paper, we build on the model by Berger et al. (2019) to compare gains from alternative mechanisms of EU fiscal integration in the presence of moral hazard. We show that any EU response strategy to the COVID-19 crisis excluding mutual financial support to member countries lacks credibility. Some form of fiscal risk sharing is indeed better than none, and the associated moral hazard can be hedged by introducing fiscal centralization to Brussels. While the desirable level of centralization increases monotonically with the stock of a country’s debt issued to finance COVID-related spending, the degree of risk sharing responds non-linearly. When the costs of delegating fiscal authority are relatively low, the optimal policy envisages increasingly higher delegation of fiscal authority and lower fiscal risk sharing. On the contrary, when the costs of transferring fiscal powers are relatively high the optimal mix favors more risk sharing. Proposed arrangements at the EU level in response to the COVID-19 shock seem reflecting these basic insights by rotating around a combination of fiscal risk sharing and delegation in the form of fiscal conditionality.

En este documento construimos un modelo de una economía pequeña y abierta con hogares parcialmente dolarizados en sus tenencias de riqueza en moneda nacional y moneda extranjera como en Felices y Tuesta (2006). En este modelo el grado de dolarización es endógeno al grado de estabilización del tipo de cambio por parte del Banco Central. En este contexto, hemos identificado la respuesta de política monetaria óptima bajo una regla y bajo discreción, y calculamos el grado óptimo de estabilización del tipo de cambio. Estos resultados tienen implicancias de política para economías con dolarización parcial y metas inflacionarias. Los resultados del modelo sugieren tres lecciones de política. Primero, si bien la dolarización parcial complica la conducción de la política monetaria, la introducción de una meta inflacionaria puede reducir los costos de la estabilidad de precios. Segundo, en una economía parcialmente dolarizada existen ganancias en términos de bienestar de incluir el tipo de cambio en la regla de política monetaria. Tercero, el suavizamiernto del tipo de cambio reduce la posibilidad de múltiples equilibrios bajo dolarización. Clasificación JEL: E52, E37, E58