The Unassuming Economist

From a paper by Christian Glocker, and Thomas Url:

“The gradual rise in temperatures motivates conceptualizing climate change as a phenomenon shaping the propagation of macroeconomic shocks, rather than as an independent shock. We formalize this in a theoretical model, showing that climate change induces a structural shift by steepening the aggregate supply curve, exacerbating the price effects of demand shocks while dampening the output response. Our empirical evidence is consistent with this prediction: higher temperatures raise the share of inflation variation attributable to demand shocks by up to 10 percentage points, underscoring the role of climate change in intensifying stagflationary dynamics rather than independently driving business cycles.”

From a paper by Pedro M. Esperança, and Paulo Júlio:

“The literature has focused primarily on the quality of forecasts for real Gross Domestic Product (GDP) and for other macroeconomic variables (e.g. inflation or unemployment), but has not satisfactorily addressed the forecast accuracy of the major expenditure components of GDP – private consumption (C), government consumption (G), investment (I), exports (X) and imports (M)4. In a recent article, Júlio et al. (2011) have analyzed, for the first time, the quality of forecasts for GDP expenditure components. The authors showed that overpredictions in investment and exports explain most of Portuguese GDP overpredictions at 1-year horizons. GDP forecast bias diminishes significantly for same-year predictions, a fact that is mostly explained by canceling out effects in component prediction errors rather than by accurate component predictions. The authors have also proposed two new statistics – Mean of Total Weighted Absolute Error (MTWAE) and Mean of Total Weighted Squared Error (MTWSE) – to objectively evaluate the overall accuracy of component predictions.

This article uses similar techniques to analyze the forecast quality of GDP expenditure components for G7 countries. Three dimensions of forecast quality are addressed here: bias, accuracy, and efficiency. We use forecast data issued by the Organization for Economic Cooperation and Development (OECD) and by the International Monetary Fund (IMF) for the 1993-2010 period, and evaluate both 1-year ahead and same-year predictions. Our focus lies on the overall quality of institutions’ forecasts, and thus we pool evaluation statistics across countries in order to obtain an aggregate overview of the main features driving these forecasts. In addition, we propose panel versions of two types of efficiency tests presented in the literature, and analyze the effects of the 2008 crisis on the quality of forecasts.”

From a paper by Andrew Jackson, Romain Svartzman, David Barmes and Luiz Awazu Pereira da Silva:

“Climate change and volatile fossil fuel prices increasingly drive macroeconomic and price instability. A successful green transition is a precondition for price stability in the long term but could generate inflationary pressures over shorter time horizons. A restrictive monetary response to such pressures would disproportionately affect the capital-intensive green investment needed for a transition. To maintain price stability without compromising the green transition, we propose adaptive inflation targeting, adjustments to monetary operations, and an institutional architecture for systematic monetary–fiscal coordination.”

From a paper by Surjit Bhalla, Karan Bhasin, and Prakash Loungani:

“The trend inflation levels in India and other emerging market economies suggest a downward trajectory regardless of the adoption of inflation targeting. Therefore, it is difficult to conclusively establish that the adoption of inflation targeting in India led to a moderation in inflation or anchoring of inflation expectations. There is also some evidence that the anchoring of household expectations predates the formal adoption of inflation targeting. Similarly, long-term expectations in India have remained firmly anchored since the early 2000s. In terms of growth, the high real interest rates policy followed during the initial years of inflation targeting has adversely affected India’s growth dynamics.”

From a paper by Luca Bettarelli, Davide Furceri, Prakash Loungani, Jonathan D. Ostry, and Loredana Pisano:

“If economic activity is considered the primary driver of climate change through emissions of carbon dioxide, then supporting economic growth and fighting emissions would appear to be at odds. However, the process of economic development may itself foster complementarity between GDP growth and emissions reductions. Such complementary in the relationship between economic development and emissions reduction might reflect changes in the industrial composition of economic activity, technological advancements or environmental consciousness. 

This view is in line with the Environmental Kuznets Curve (EKC) hypothesis: that per-capita income growth is associated with increases in carbon emissions up to a certain threshold of economic development, but beyond that threshold, higher per-capita incomes are associated with lower emissions per capita. The EKC hypothesis, suggests that economic development is actually a pathway to environmental improvements. 

We test the EKC hypothesis for 191 countries over 1989-2022, enabling us to study the overall validity of the EKC hypothesis at global level. Moreover, by interacting GDP per capita with an index measuring the stringency of climate policies, we shed light on whether and how climate policies mediate the impact of GDP on emissions. We find that emissions respond to increasing per-capita income levels nonlinearly, with a turning point at about $25,000 on average. Importantly, we show that climate policies shape the relationship between income and emissions by making the EKC lower and flatter, thus favouring a decoupling between emissions and economic activity. Our results have important policy implications, as they identify economic development as a pathway to environmental improvements. We also show that environmental policies are an essential ingredient to achieve decoupling of emissions and economic output over the longer term.”