Sustainability with Risky Growth

Title: Sustainability with Risky Growth

Abstract: We investigate the fundamental determinants of sustainability in general equilibrium. We adopt a definition of sustainability that requires that the welfare of future generations is not expected to decrease on average. We then use a stochastic growth model to explore the conditions under which an economy is sustainable, considering different types of risk. In general equilibrium, sustainability boils down to supply-side factors, with increased growth and decreased risk making sustainability more likely. We find that the type of risk plays an essential role in sustainability. While most economies appear sustainable when we only consider Brownian consumption risk, both disaster risk and long-term Markov switching risk can cause many countries to fall below a sustainable trajectory. Our results have policy implications regarding endogenous investment, catastrophic-risk management, and investments in clean and dirty technologies.