Abstract: This paper studies the design of a carbon tax when environmental factors, such as air carbon-dioxide emissions (CO2), directly affect agents’ marginal utility of consumption. Our first result is that the optimal tax is determined by the shadow price of CO2 emissions. We then use asset-pricing theory to estimate this implicit price in the data and find that the optimal tax is pro-cyclical. It is therefore optimal to use the carbon tax to “cool down” the economy during booms and stimulate it in recessions. The optimal policy not only generates large welfare gains, it also reduces risk premiums and raises the average risk-free real rate. The effect of the tax on asset prices and welfare critically depends on the emission-abatement technology.
ECB WP Slides

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.
Bank of Canada Working Paper

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.
Paper Slides

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

Abstract: The paper investigates the dynamic effects of weather shocks on monthly agricultural production in Peru with local projections. An adverse weather shock, measured by an excess of heat or rain, always generates a negative downturn in agricultural production, but its magnitude and duration depend on several factors such as the type of crop concerned, the land geographical type and the season. On average, a weather shock can cause a monthly decline by 5% of agricultural production up to four consecutive months. The response is time and space dependent. A shock in tropical forest regions or occurring during growing season exhibits a much larger response. At a macroeconomic level, weather shocks entail a surge in inflation and reduction in aggregate production.
Paper