Macroeconomics

How much will it cost to meaningfully reduce greenhouse gas (GHG) emissions on a global scale? The answer is critical for assessments of how to address climate change—affecting public support, political will, and policy choices. We find that the “bottom-up” estimation approach emphasized by the United Nations Intergovernmental Panel on Climate Change (IPCC) reports considerably lower costs for emission reductions than leading “top-down” economic models.

With China’s economic growth slowing at the same time that its emissions continue to rise, it is clear that its carbon-intensive investment model has run its course. Chinese leaders urgently need to follow advanced economies in shifting toward greater domestic consumption and reduced energy demand.

Carbon pricing: Across (and sometimes even within) academic disciplines, no topic under the broad umbrella of climate economics tolerates quite so large a gap between facts and dogma, and between the power of a seemingly simple idea on the one hand and raw political power on the other.

Heated academic debates between proponents and opponents of traditional economic growth under capitalism might make for good television, but they offer little in the way of solutions. Climate change demands that we achieve both growth and degrowth, depending on the activity and economic sector in question.

We study how monetary policy and risk shocks affect asset prices in the US, the euro area, and Japan, differentiating between “traditional” monetary policy and communication events, each decomposed into “pure” and information shocks. Communication shocks from the US spill over to risk in the euro area and vice versa, but traditional US shocks show no spillover effects to risk. Both monetary policy and communication shocks spill over to stocks, with euro area information spillovers being particularly strong.

Environmental, Social and Governance (ESG) investing has attracted much attention in asset management this past decade. Asset managers who consider ESG issues when making investment decisions potentially face a trade off with their fiduciary duty to attempt to outperform investment benchmarks (“generate alpha”). We first analyze the relationship between alpha generation and ESG metrics. However, because there are no well-accepted ESG standards, we also measure the impact companies have on the U.N.’s Sustainable Development Goals (SDG´s). Our research consists of three steps.

Emissions abatement alone cannot address the consequences of global warming for weather disasters. We model how society adapts to manage disaster risks to capital stock. Optimal adaptation — a mix of firm-level efforts and public spending — varies as society learns about the adverse consequences of global warming for disaster arrivals. Taxes on capital are needed alongside those on carbon to achieve the first best.

We use information in higher-order moments to identify aggregate supply and aggregate
demand shocks for the U.S. economy. Traditional methods based on sign restrictions and/or
second-order moments yield only “set” or “interval” identification but higher-order moments
are shown to considerably aid identification. Aggregate supply shocks dominated recessions
in the 1970s and early 1980s, while aggregate demand shocks dominated most later recessions.

We study a fiscal policy model in which the government is present-biased towards public spending. Society chooses a fiscal rule to trade off the benefit of committing the government to not overspend against the benefit of granting it flexibility to react to privately observed shocks to the value of spending. Unlike prior work, we examine rules under limited enforcement: the government has full policy discretion and can only be incentivized to comply with a rule via the use of penalties which are joint and bounded. We show that optimal incentives must be bang-bang.