Abstract: This paper demonstrates that empirically grounding the discount factor significantly influences the determination of the carbon price. Using two complementary nonlinear statistical approaches, we assess which utility formulations and corresponding stochastic discount factors best align with U.S. data. We provide evidence that habit formation is essential for capturing the time variation in the stochastic discount factor necessary to match the data. This increased time variation raises the carbon price by 32\% and makes it five times more procyclical compared to standard models. The heightened procyclicality reduces aggregate risk, the risk premium, and the need for precautionary savings.

Latest Draft Slides Replication files

Abstract: We explore the role of public subsidies in mitigating the transition costs associated with achieving a climate-neutral objective by 2060. To this end, we develop and estimate a quantitative macro-climate model for the world economy featuring an endogenous market structure for carbon abatement products. Public subsidies, fully financed by a carbon tax, are found to be an efficient instrument to promote firm entry into the abatement good sector by fostering competition and lowering the selling price of such products. We estimate that the subsidy, optimally distributed between startups at 60\% and existing companies at 40%, would save nearly $ 2.9 trillion in world GDP each year by 2060. Finally, delaying the net-zero transition would imply giving an even larger share to startups.

SSRN Paper Banque de France WP Online Appendix Slides

Abstract: This paper investigates the role of heterogeneous elasticities of substitution in the US production network in the transmission of idiosyncratic shocks. We develop and estimate a multi-industry general equilibrium model featuring heterogeneous elasticities of substitution in input demands. Using quarterly data on 14 US industries, we provide evidence of a relatively large dispersion in input-substitution elasticities across US industries that are generally larger than those previously found in the literature. This dispersion is quantitatively important as substitution heterogeneity accounts for 6% of the total supply shock transmission in the US, and peak to 80% for inter-industry propagation.

Paper

Abstract: Climate change confronts central banks with two inflationary challenges: climateflation and greenflation. We investigate their implications for monetary policy by developing and estimating a tractable nonlinear New Keynesian Climate model featuring climate damages and mitigation policies for the global economy. We find that mitigation policies aligned with the Paris Agreement result in higher, more persistent inflation than laissez-faire policies. Central banks can attenuate this inflationary pressure by accounting for the rising natural rate of interest, at the cost of lower GDP during the transition. This short-term trade-off ensures long-term macroeconomic stability resulting from a net-zero emission world.

CEPR WP SSRN Paper Slides Replication files

Abstract: We discuss the timing and strength of the Fed’s reaction to the recent inflation surge within an estimated micro-founded macroeconomic model with heterogeneous expectations. Our model encompasses a time-varying cross-sectional distribution of subjective inflation forecasts that can persistently drift away from the central bank target. We obtain a closed-form solution that we estimate using Bayesian techniques on both US macroeconomic time series and forecast data from the Survey of Professional Forecasters. Counterfactual simulations suggest that the timing – rather than the strength – of the policy reaction to this inflation surge is critical for anchoring inflation expectations and preventing the entrenchment of above-target inflation. We show that the Fed fell behind the curve in 2021 since an earlier tightening could have reduced the inflation peak without triggering a recession. However, further delays would have unanchored inflation expectations, strengthened the inflation surge, and entailed larger output losses.

Paper

Abstract: Emissions markets play a crucial role in reducing pollution by encouraging firms to minimize costs. However, their structure heavily relies on the decisions of policymakers, on the future economic activities, and on the availability of abatement technologies. This study examines how changes in regulatory standards, firms’ abatement costs, and emissions levels affect allowance prices and firms’ efforts to reduce emissions. This is done in a Radner equilibrium framework encompassing inter-temporal decision-making, uncertainty, and a comprehensive assessment of the market dynamics and outcomes. The results of this research have the potential to assist policymakers in enhancing the structure and efficiency of emissions trading systems, through an in-depth comprehension of the reactions of market stakeholders towards different market situations.

Paper

Abstract: We investigate monetary policy where the wages and prices Phillips curves exhibit true curvature, moving beyond the quasi-linear structure of the standard nonlinear New Keynesian Phillips curves (NKPC). To address this limitation, we propose a New Keynesian (NK) model featuring endogenous adjustment frequencies for price and wage setting. Using Eurozone data spanning 1999 to 2023Q4, we estimate and simulate the nonlinear model. We then study the recent inflation surge and the implication of state-dependent prices and wages for monetary policy in the estimated non-linear model. Unlike conventional models, our framework does not rely mostly on exogenous supply shocks to explain inflation dynamics. Instead, the effects of shocks on inflation dynamics vary by time, magnitude, and state of the business cycle. The inflation-output stabilization trade-off faced by monetary policy varies with business cycle conditions. For example, monetary policy demonstrates greater efficacy in controlling inflation, and supply shocks have larger effects during periods of elevated inflation.

Abstract: Our study focuses on climate models extensively employed in climate science and economicclimate research, which project temperature outcomes from carbon emission trajectories. Addressing the need for rapid evaluation in Integrated Assessment Models – critical tools for carbon emission mitigation policy analysis – we design a neural network (NN) meta-model as an efficient surrogate for mapping, in an infinite horizon setting, emission trajectories into temperature trajectories (usually modeled as coupled systems of differential equations). Our approach combines a projection on Generalized Dirichlet polynomials, whose coefficients are inputs of the NN and a suitable time change for handling infinite horizon: we prove that the quantity of interest is, under some assumptions, a smooth function of the inputs and therefore, is prone to accurate NN approximation. After a training with augmented Shared Socio-economic Pathways scenarii, the NN achieves high-fidelity approximations of the original climate model. Additionally, we establish theoretical accuracy guarantees for both the encoding and neural network approximation. Our numerical experiments demonstrate the framework’s computational efficiency and accuracy.

Abstract: This paper proposes a new methodological approach using high-frequency data and local projections to assess the impact of weather on agricultural production. Local projections capture both immediate and delayed effects across crop types and growth stages, while providing early warnings for food shortages. Adverse weather shocks, such as excess heat or rain, consistently lead to delayed downturns in production, with heterogeneous effects across time, crops, and seasons. We build a new index of aggregate weather shocks that accounts for the typical delay between event occurrence and economic recognition, finding that these shocks are recessionary at the macroeconomic level, reducing inflation, production, exports and exchange rates.

Published Paper Working Paper Replication notebook

Abstract: We study the general equilibrium effects of carbon permit banking during the transition to a climate-neutral economy by 2050. To this end, we develop and estimate an environmental real business cycle model for the European Union, in which the business sector is regulated by an emission trading system. Firms are allowed to transfer unused permits from one period to the next (banking), but the reverse direction (borrowing) is prohibited. Allowing for positive banking gives firms the opportunity to act as speculators and enables them to smooth their permit demand along the business cycle. Our projection exercises underscore the critical role of permit banking in shaping the policy outcomes. Specifically, the 2023 cap reform would lead to a strong increase in permit banking until 2035, a doubling of the carbon price, and an average GDP loss of approximately 5.3% or 6% (depending on whether we account for the market stability reserve) by 2060. Importantly, forgetting about permit banking when assessing cap policies would lead to both a significant underestimation of the total macroeconomic effects and an inaccurate representation of the carbon emission trajectory.

Paper JEEM Replication files Paper SSRN

Abstract:Social learning (SL) is a behavioral model in which expectations and the resulting aggregate dynamics stem from the interactions of a large amount of heterogeneous agents. Nonetheless, this framework has so far lacked micro-foundations and a general-solution method. This paper bridges these two gaps with: (i) a micro-founded New Keynesian model with social learning expectations; (ii) a general solution method that we implement in a Dynare toolbox that solves any linear state-space model with SL expectations. The resulting framework provides a self-contained tool to contrast policy analysis under SL and rational expectations. As an illustration, optimal monetary policy rules are studied under the two expectation regimes.
Paper

Abstract: The first contribution of this paper is to develop a model that jointly accounts for the missing disinflation in the wake of the Great Recession and the subsequently observed inflation-less
recovery. The key mechanism works through heterogeneous expectations that may durably lose their anchorage to the central bank (CB)’s target and coordinate on particularly persistent below-target paths. We jointly estimate the structural and the learning parameters of the model by matching moments from both macroeconomic and Survey of Professional Forecasters data. The welfare cost associated with those dynamics may be reduced if the CB communicates to the agents its target or its own inflation forecasts, as communication helps anchor expectations at the target. However, the CB may lose its credibility whenever its announcements become decoupled from actual inflation, for instance in the face of large and unexpected shocks.
SSRN Paper Bank of Canada Working Paper Slides Online Appendix

Abstract: This paper studies the design of Ramsey optimal monetary policy in a Health New Keynesian (HeNK) model with Susceptible, Infected and Recovered (SIR) agents. The nonlinear model is estimated with maximum likelihood techniques on Euro Area data. Our objective is to deconstruct the mechanism by which contagion risk affects the conduct of monetary policy. If monetary policy is the only game in town, we find that optimal policy features significant deviations from price stability to mitigate the effect of the pandemic. The best outcome is obtained when the optimal Ramsey policy is combined with a lockdown strategy of medium intensity. In this case, monetary policy can concentrate on its price stabilization objective. Paper Dynare codes Slides

Abstract: How much do weather shocks matter? The literature addresses this question in two isolated ways: either by looking at long-term effects through the prism of calibrated theoretical models, or by focusing on both short and long terms through the lens of empirical models. We propose a framework that reconciles these two approaches by taking the theory to the data in two complementary ways. We first document the propagation mechanism of a weather shock using a Vector Auto-Regressive model on New Zealand Data. To explain the mechanism, we build and estimate a general equilibrium model with a weather-dependent agricultural sector to investigate the weather’s business cycle implications. We find that weather shocks: (i) explain about 35% of GDP and agricultural output fluctuations in New Zealand; (ii) entail a welfare cost of 0.30% of permanent consumption; (iii) critically increases the macroeconomic volatility under climate change, resulting in a higher welfare cost peaking to 0.46% in the worst case scenario of climate change.
pdf file   online appendix dynare 4.5 code
dynare 4.6+ code

Abstract: This paper questions the role of cross-border lending in the definition of national macroprudential policies in the European Monetary Union. We build and estimate a two-country DSGE model with corporate and interbank cross-border loans, Core-Periphery diverging financial cycles and a national implementation of coordinated macroprudential measures based on Countercyclical Capital Buffers. We get three main results. First, targeting a national credit-to-GDP ratio should be favored to federal averages as this rule induces better stabilizing performances in front of important divergences in credit cycles between core and peripheral countries. Second, policies reacting to the evolution of national credit supply should be favored as the transmission channel of macroprudential policy directly impacts the marginal cost of loan production and, by so, financial intermediaries. Third, the interest of lifting up macroprudential policymaking to the supra-national level remains questionable for admissible value of international lending between Eurozone countries. Indeed, national capital buffers reacting to the union-wide loan-to-GDP ratio only lead to the same stabilization results than the one obtained under the national reaction if cross-border lending reaches 45%. However, even if cross-border linkages are high enough to justify the implementation of a federal adjusted solution, the reaction to national lending conditions remains remarkably optimal.
pdf Appendix dynare code

Abstract: In an estimated DSGE model of the European Monetary Union that accounts for financial differences between core and peripheral countries, we find that country-adjusted macroprudential measures lead to significant welfare gains with respect to a uniform macroprudential policy rule that reacts to union-wide financial developments. However, peripheral countries are the winners from the implementation of macroprudential measures while core countries incur welfare losses, thus questioning the interest of adopting coordinated macroprudential measures with peripheral countries.
pdf file dynare file Data

Abstract: This paper evaluates the role of financial intermediaries, such as banks, in the extensive margin of activity. We build a DSGE model that combines the endogenous determination of the number of firms operating on the goods market with financial frictions through a financial accelerator mechanism. We more particularly account for the fact that the creation of a new activity partly requires loans to finance spendings during the setting period. This model is estimated on US data between 1993Q1 and 2012Q3. We get three main results. First, financial frictions play a key role in determining the number of new firms. Second, in contrast with real macroeconomic shocks (where investment in existing production lines and the creation of new firms move in the opposite direction), financial shocks have a cumulative effect on the two margins of activity, amplifying macroeconomic fluctuations. Third, the critical role of financial factors is mainly observed in the period corresponding to the creation of new firms. In the long run, the variance of the effective entry share is almost explained by supply shocks.
pdf file dynare file data

Abstract: This paper seeks to evaluate quantitatively how interbank and corporate cross-border flows shape business cycles in a monetary union. Using Bayesian techniques, we estimate a two-country DSGE model that distinguishes between Eurozone core and peripheral countries and accounts for national heterogeneities and a set of real, nominal and financial frictions. We find evidence of the key role of this cross-border channel as an amplifying mechanism in the diffusion of asymmetric shocks. Our model also reveals that under banking globalization, most national variables and the central bank interest rate are less sensitive to financial shocks while investment and current account imbalances are more sensitive to financial shocks. Finally, a counterfactual analysis shows that cross-border lending has affected the transmission of the recent financial crisis between the two groups of countries.
pdf dynare file Technical Appendix

Abstract: The authors provide a static two-country new Keynesian model to teach two related questions in international macroeconomics: the international transmission of unilateral monetary policy decisions and the gains coming from the coordination monetary rules. They concentrate on “normal times” and use a thoroughly graphical approach to analyze the questions at hand. In this setting monetary policy is conducted using interest rates rules and economic integration between nations does not necessarily create the case for the coordination of monetary policy. In particular, they show that the conduct of optimal national monetary policies does not make any difference with the coordination of national policies, as this creates a situation where the international monetary system operates “Near an International Cooperative Equilibrium” (NICE).

Abstract: This paper aims at providing a self contained presentation of the ideas and solution procedure of New Keynesian Macroeconomics models. Using the benchmark “3 equation model”, we introduce the reader to an intuitive, static version of the model before incorporating more technical aspects associated with the dynamic nature of the model. We then discuss the relative contribution of supply, demand and policy shocks to the fluctuations of activity, inflation and interest rate, depending on the key underlying parameters of the economy.
dynare file

Abstract: This article introduces macroprudential policy using a static New Keynesian Macroeconomics model with financial frictions. The authors analyze two related questions: First, they show how the procyclicality of financial factors, captured by the financial accelerator, amplifies the transmission of supply and demand shocks and impacts the intuition they get from a basic intermediate macroeconomics. Second, adopting an optimal policy perspective, they show how a policymaker may use macroprudential policy to complete monetary policy measures. Following the Mundellian Policy Assignment principle, macroprudential policy should be specialized to address the procyclicality problem to suppress welfare losses associated with the building of financial imbalances, thus helping monetary policy to concentrate on the output inflation tradeoff.
pdf file