The Unassuming Economist

From a paper by Yushi Xu, Baifan Chen, Jionghao Huang, Qingsha Hu, and Shuning Kong:

“This study innovatively combines the structural vector autoregression model with a novel frequency connectedness approach to explore the dynamic connectedness between heterogeneous oil price shocks and inflation across both developed and emerging economies. By investigating the connectedness relationship between oil shocks and inflation from the G7 (Group of Seven countries) and BRICS (Brazil, Russia, India, China, and South Africa) countries, our findings reveal a significantly dynamic heterogeneous oil–inflation nexus. Firstly, our analysis reveals that oil supply shocks predominantly serve as receivers of inflation, whereas aggregate demand and oil-specific demand shocks primarily act as transmitters. Additionally, the connectedness between oil price shocks and inflation is mainly driven by long-term factors and exhibits notable time-varying characteristics, with significant increases in connectedness strength observed during periods of oil and financial crises. Lastly, our study shows that developed economies are more inclined to transmit shocks to the global crude oil market, while their vulnerability to external shocks from the international crude oil market is markedly heightened by greater resource dependence and a lack of self-sufficiency. This study not only provides a new perspective on understanding the intricate relationship between oil price shocks and inflation but also offers a crucial theoretical framework and empirical evidence to assist policymakers and investors in navigating the fluctuations of the global energy market.”

From a post by Matthew E. Kahn:

“I like Peter Coy’s new New York Times column and want to use it to discuss the climate change adaptation challenge.

Here is a direct quote from Coy;

“Knight’s thinking is as relevant now as it was in 1921, when “Risk, Uncertainty and Profit” was published. We still need tools for coping with uncertainty. Knight’s perspective can guide us to a middle course between trying to avoid uncertainty entirely, which is impossible, and plunging headlong into the darkness, which is reckless.

Knight has been forgotten or misconstrued repeatedly over the past century. A new book by the scholar Amar Bhidé brings back his original insights and dares to try to improve upon them — mostly by extending them into realms that Knight didn’t consider, such as the persuasive techniques that entrepreneurs use to overcome the uncertainty felt by investors, customers and partners.”

Peter Coy has not interviewed me about my work on Knightian Uncertainty applied to climate change adaptation. In my academic writing and in my 2021 book Adapting to Climate Change,“

Continue reading here.

From a paper by Knut Are Aastveit, Hilde C. Bjørnland, Jamie L. Cross and Helene Olsen Kalstad:

“After decades of a stable environment with low inflation in most advanced economies, global inflation rates surged unexpectedly during the pandemic and have remained elevated since. This paper demonstrates that inflation expectations have significantly amplified the global demand and supply shocks triggered by the pandemic, playing a crucial role in sustaining elevated inflation in the post-pandemic regime. We establish this finding by applying a structural vector autoregression model that includes various shocks to global demand and supply, along with domestic inflation and inflation expectations, across six economies: the United States, Canada, New Zealand, the Euro area, the United Kingdom, and Norway. First, we document that global demand and supply shocks in the oil market, as well as disruptions in global supply chains, have been major drivers of the recent inflation surge in all these economies. Then, through various counterfactual exercises, we demonstrate that inflation expectations generally amplify the transmission of global shocks to inflation — particularly in Canada, New Zealand, and the US during the post-pandemic period. As a result, managing inflation expectations should remain a crucial policy objective to mitigate their amplifying effects on inflation.”

From a paper by Amar Rao, Brian Lucey, and Satish Kumar:

“The functioning of energy markets is essential for global stability and is heavily influenced by geopolitical risks. Understanding these risks is critical for policymakers, market analysts, and nations. This study investigates the impact of geopolitical risks and their components on the futures markets of WTI crude oil and natural gas, utilizing time and frequency connectedness analysis along with impulse response function methods. The analysis is based on a dataset comprising daily prices of spot and futures contracts (across various maturities) as well as treasury yields. Our findings reveal that geopolitical risks have a significant, negative impact on the interest-adjusted spread of WTI crude oil. In contrast, the interest-adjusted spread of natural gas futures (NGF) displays a more complex pattern: while short-term maturities show an insignificant response, long-term maturities exhibit a significant reaction. Spillover effects are more pronounced in the short term but tend to weaken over longer horizons. This study underscores the dynamic influence of geopolitical risks on both key energy markets. Its findings offer a practical framework for risk management, equipping market participants and policymakers with valuable insights to better understand and respond to geopolitical risks in the energy sector.”

From Climate Economics:

“Here are the slides from my recent 25 minute talk. Here is the video where I speak first and then Siqi Zheng speaks about decarbonizing the real estate sector. Here is the entire lecture series.

Six Quick Points

#1 In the developing world, billions of people are moving from rural areas to the cities. Cities offer greater economic opportunity, more excitement and one’s productivity is higher and more robust for urbanites. Farming is more affected by wild weather than is urban life.

#2 People who expect to live their lives in cities invest more in their human capital. Those with more skills are better at solving new problems and are better able to adapt to whatever challenges climate change is posing.

#3 Urbanization raises our income and richer people, cities and nations are better able to adapt to risks. Economic development accelerates adaptation.

#4 Nations with a larger menu of cities to move to will be better able to adapt to climate change. If a nation has one dominant city, then rural to urban migration will cause the mega city to get too big and this will lower quality of life in the slums in that city.

#5 Government investments in place based infrastructure and social insurance often have the unintended consequence of crowding out private self protection investment. That is BAD! Social scientists need to figure out how to design resilience policies such that they are complements not substitutes for private adaptation efforts.

#6 The Lucas Critique; We are not passive victims in the face of climate change. We have an ever growing menu of adaptation strategies that protect us against the serious challenges we now face.”