The Unassuming Economist

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.”

From a new paper by Ruoyu Chen, Guoqing Wang, Nabiha Jamil, and Najaf Iqbal:

“We exploit the recent inclusion of green bonds to the “Eligible Collateral Assets” (ECAs) for the “Medium-term Loan Facility” (MLF) by the People’s Bank of China (PBOC) as a quasi-natural experiment and analyze its impact on the credit spreads between green and non-green bonds. We use the daily bond market data and employ the difference-in-differences (DID) model for analysis. Adding green bonds to the pool of ECAs by the PBOC significantly reduces the credit spreads (the required return on green bonds was higher earlier). The policy has a more prominent effect on the bonds issued by high-rated and local banks, as well as the ones situated in the Green Finance Reform Innovation Pilot Zones (GFRIPZ). The results of the parallel trend test indicate that the policy effect has a short-term lag, but overall, it shows a trend of continuous enhancement during the sample period.”

From a paper by Sunil Sharma:

“Despite over a decade of reforms, financial systems remain fragile, and with the ongoing degradation of the biosphere addressing these fragilities is becoming even more challenging. The green digital transition requires innovation and experimentation. Laws and rules must support competition for novel technologies and solutions, allow for failure, and facilitate re-allocation of labor, real assets, and capital. Hence, the case for robust banks, nonbank financial intermediaries, and market infrastructure is even more urgent and compelling.

Complexity and deep uncertainty characterize the green digital transition and the operation of economic systems. Taking this seriously means recognizing that simpler heuristic approaches may dominate complicated optimization strategies. We must be cognizant of what we know, what we can know over relevant time horizons, and what may be unknowable.

Given the weaknesses of the current approach to financial regulation and oversight, changes in institutional and financial structure should be considered that would reduce the use of “runnable” short-term debt, create more transparency and better incentives for all players, and hence lessen the need for complicated rules, explicit and implicit State guarantees, and interventions in markets.

In an era of chronic and acute disruptions, durable price and financial stability will require not just accounting for financial hazards, but also engaging in promoting a structural transition. With time running out and the world approaching critical ecological thresholds, central banks and financial regulators will have to integrate environmental considerations into their operations and policies and collaborate more closely with other government agencies.

To increase the systemic resilience of the financial sector, the policy essay argues for:

(i) simplicity in prudential rules; (ii) higher buffers in financial institutions; (iii) greater modularity in the structure of the financial system; (iv) better use of market forces and public discipline; and (v) more credible and effective supervision.”