Finite resources and the world economy

Abstract

We build and evaluate a global macroeconomic model incorporating natural-resource scarcity. The model features low short-run substitutability between the natural resource and other inputs, while in the longer run endogenous directed technical change—allowing the economy to save on scarce resources—generates much higher substitutability, with rather stable cost shares. A nontrivial feature of the framework is secularly increasing resource use: initially, when the resource is abundant, much less is used of it, and as physical and human capital are accumulated, its use increases. The model is also able to generate highly volatile prices at higher frequencies.

Topics & Concepts