Title : Long-run Trends in Long-Maturity Real Rates

Tuesday, October 18, 2022

Barbara Rossi
ICREA Professor at the University Pompeu Fabra, Associate Researcher at CREI and Research Professor at the Barcelona School of Economics. 

Abstract: 
Taking advantage of key recent advances in long-run financial and economic data, this paper analyzes the statistical properties of global long-maturity real interest rates over the past seven centuries. In contrast to existing consensus, which has overwhelmingly concentrated on short samples for short-maturity rates, we find that long-maturity real interest rates across advanced economies are in fact trend stationary, and exhibit a persistent downward trend since the Renaissance. We investigate structural breaks in real interest rates over time using multiple statistical approaches, and find that only the Black Death and the “Trinity default” of 1557 appear as consistent inflection points in capital markets on both global and country levels. While a 1914 break is also suggested in multiple series (though less robust than existing literature would lead one to expect), the evidence for an inflection point in 1981 appears much weaker. We further examine trends in persistence, as well as commonly-invoked drivers of global real rates: exploiting significant data advances, we argue that historically, demographic and productivity factors appear to show no promising causal role, and in fact diverge from real interest rates over the long run.

Rick van der Ploeg, Research Director of OXCARRE, University of Oxford.

Title: On Current and Future Carbon Prices in a Risky World

Date: April 1^st, 2022

Time: 2:30 - 4:00 p.m. EST

Abstract:

We analyse the optimal paths of abatement and carbon prices under a variety of economic, temperature and damage risks. Carbon prices grow in line with economic growth, but with convex damages and temperature-dependent risks of climatic tipping points grow more quickly and with gradual resolution of uncertainty grow more slowly. With temperature-dependent economic damage tipping points carbon prices are higher, but when the tipping point occurs, the price jumps downward. With a temperature cap the e_cient carbon price rises at the risk-adjusted interest rate. Allowing for damages as well as a cap leads to a higher carbon price which grows more slowly. But as temperature and cumulative emissions approach their caps, the carbon price is ramped up ever more. Policy makers should expect a rising path of carbon prices.

Glenn D. Rudebusch is a Nonresident Senior Fellow at the Brookings Institution with the Hutchins Center on Fiscal & Monetary Policy.  He is also a Senior Fellow at New York University in the Volatility and Risk Institute of the Stern School of Business.

Title: The Rising Cost of Climate Change: Evidence from the Bond Market

Date: February 18^th, 2022

Time: 2:30 - 4:00 p.m. EST

Abstract:

Social discount rates (SDRs) are crucial for evaluating the costs of climate change. We show that the fundamental anchor for market-based SDRs is the equilibrium or steady-state real interest rate. Empirical interest rate models that allow for shifts in this equilibrium real rate find that it has declined notably since the 1990s, and this decline implies that the entire term structure of SDRs has shifted lower as well. Accounting for this new normal of persistently lower interest rates substantially boosts estimates of the social cost of carbon and supports a climate policy with stronger carbon mitigation strategies.

Dr. Lawrence H. Goulderis the Shuzo Nishihara Professor in Environmental and Resource Economics at Stanford and Director of the Stanford Environmental and Energy Policy Analysis Center.

Title: China’s Unconventional Nationwide CO2 Emissions Trading System: Cost-Effectiveness and Distributional Impact

Date: November 12, 2021

Time: 2:30 pm – 4:00 p.m. EST

Abstract:

China is implementing what is expected to become the world’s largest CO₂ emissions trading system. To reduce emissions, the nation will employ a tradable performance standard (TPS), a rate-based instrument differing significantly from cap&trade (C&T) and a carbon tax, emissions pricing instruments used elsewhere. With matching analytically and numerically solved models, we assess the cost-effectiveness and distributional impacts of China’s TPS for reducing CO₂ emissions from the power sector.

The TPS implicitly subsidizes electricity output, which limits its use of output-reduction as a channel for reducing emissions. It also gives power plants with especially low emissions-output ratios intentives to expand output relative to the business-as-usual baseline. These features compromise the TPS’s cost-effectiveness relative to C&T.  The use of differing benchmarks (emissions-intensity standards) also compromises cost-effectiveness by distorting relative production levels and by lowering the cost-reducing potential of allowance trading.  In our central case simulations, the TPS’s overall costs are about 34 percent higher than those of C&T. 

Although the use of non-uniform benchmarks compromises cost-effectiveness, it can help serve regional distributional objectives.  We assess the aggregate costs of customizing benchmarks in order to reduce the adverse profit impacts in provinces that otherwise would suffer a disproportionate cost from the TPS.

Dr. Nakamura is the Chancellor’s Professor of Economics at the University of California, Berkeley. She is an award winning and highly cited researcher in Inflation and Price Dispersion, Monetary and Fiscal Policy.  

Title: The Slope of the Phillips curve:  Evidence from U.S. States? 

Date: April 30, 2021

Time: 3:00 p.m. – 4:30 p.m. Eastern DST (note a different than usual starting time!)

Abstract:  
We estimate the slope of the Phillips curve in the cross section of U.S. states using newly constructed state-level price indexes for non-tradeable goods back to 1978. Our estimates indicate that the Phillips curve is very flat and was very flat even during the early 1980s. We estimate only a modest decline in the slope of the Phillips curve since the 1980s. We use a multi-region model to infer the slope of the aggregate Phillips curve from our regional estimates. Applying our estimates to recent unemployment dynamics yields essentially no missing disinflation or missing reinflation over the past few business cycles. Our results imply that the sharp drop in core inflation in the early 1980s was mostly due to shifting expectations about long-run monetary policy as opposed to a steep Phillips curve, and the greater stability of inflation since the 1990s is mostly due to long-run inflationary expectations becoming more firmly anchored.

A Reconsideration of Money Growth Rules

Friday, November 20, 2020

A New Keynesian model, estimated using Bayesian methods over a sample period that includes the recent episode of zero nominal interest rates, illustrates the effects of replacing the Federal Reserve's historical policy of interest rate management with one targeting money growth instead. Counterfactual simulations show that a rule for adjusting the money growth rate, modestly and gradually, in response to changes in the output gap delivers performance comparable to the estimated interest rate rule in stabilizing output and inflation. The simulations also reveal that, under the same money growth rule, the US economy would have recovered more quickly from the 2007- 09 recession, with a much shorter period of exceptionally low interest rates. These results suggest that money growth rules can serve as simple but useful guides for monetary policy and eliminate concerns about monetary policy effectiveness when the zero lower bound constraint is binding.

The Department of Economics and the Faculty of Social Sciences at the University of Ottawa invite you to the Marleau Lecture Series on Economic and Monetary Policy. Please join our virtual workshop “Digital Currency and Monetary Policy” to discuss the design and consequences of a central bank digital currency. The keynote speaker will be Professor Fernández-Villaverde (University of Pennsylvania, NBER and CEPR). In his presentation, Professor Fernández-Villaverde will build on his recent research, which is featured in Cryptocurrencies: A Crash Course in Digital Monetary Economics and Central Bank Digital Currency: Central Banking for All?

Friday, October 30, 2020

Agenda

Research panel session: 10 a.m. – 12 p.m., Eastern DST

• Anil Ari (IMF) Designing Central Bank Digital Currencies
• Janet Jiang (Bank of Canada) Bank Market Power and Central Bank Digital Currency: Theory and Quantitative Assessment
• Michael Kumhof (Bank of England) The Macroeconomics of Central Bank Issued Digital Currencies
• Pierpaolo Benigno (Luiss Guido Carli University, EIEF) Cryptocurrencies, Currency Competition and the Impossible Trinity

Keynote presentation: 2:30 p.m. – 4 p.m., Eastern DST

• Jesús Fernández-Villaverde (University of Pennsylvania) Cryptocurrencies, Fintech, and All That: Monetary Economics in the 21st Century

Time-Varying Expectation Effects of Switching Financial Uncertainty

Friday, September 18, 2020

This paper investigates how regime switches in capital market conditions affect macroeconomic variables by employing a dynamic stochastic general equilibrium (DSGE) model with financial frictions derived from costly-state-verification and a risk process of switching steady-state means. Defining switches to the financial regimes as uncertainty shocks, transition probabilities between financial regimes influence entrepreneurial choices: upon an adverse shock, a bleak outlook of the capital market causes slow recovery of investment. By utilizing a latent factor method, our approach explicitly estimates time-varying transitions resulting from statistical feedbacks from past fundamental shocks to switching of financial regimes. We uncover evidence of time-varying expectations significantly affected by the feedback in the U.S. data and quantify the contribution of each fundamental shock. We also find that our uncertainty factor significantly explains the existing credit market uncertainty measures.

An empirical defence of inflation targeting and the open-economy Phillips Curve from a data-rich perspective

On Friday, September 20, 2019, Professor Morley presented the results of his two ongoing research projects related to empirical analysis of inflation. The first project evaluates inflation targeting in Australia using a factor modelling approach. The second project conducts a cross-country analysis of the open-economy Phillips Curve for a number of advanced and emerging economies (including Canada). 

James Morley was appointed as Professor of Macroeconomics at the University of Sydney in 2017 and is Co-Director of the "Global Perspectives on Economic Policy" initiative for the Faculty of Arts & Social Sciences. He received his PhD from the University of Washington in 1999 and previously held positions at Washington University in St. Louis and the University of New South Wales, most recently as Associate Dean (Research) of the UNSW Business School from 2014-2017. His research focuses on the empirical analysis of business cycles, stabilization policy, and sources of persistent changes in macroeconomic and financial conditions.

He is an Academic Fellow of the Reserve Bank of New Zealand and has been a visiting scholar at various policy institutions worldwide, including the Bank of Canada, Bank Negara Malaysia, and the Bank for International Settlements. He is a former President of the Society for Nonlinear Dynamics and Econometrics and is currently Co-Editor of The Economic Record.

A Sufficient Statistic Approach for Optimal Monetary Policy (with G. Mesters)

Wednesday, May 15, 2019

If a monetary policy path is chosen optimally, any perturbation to that path should have no first-order effect on welfare. Drawing on this insight, we show that the impulse responses to monetary shocks are sufficient statistics to evaluate the optimality of a given policy, and we propose a “sufficient statistic targeting rule” that preserves all the benefits of targeting rules ---simplicity, transparency and immunity to time-consistency problems---, while remedying their one major limitation: non-robustness to model variations. The sufficient statistic targeting rule encompasses earlier targeting rules from the literature and generalizes the Brainard conservatism principle to a model-free setting. We test the optimality of the Fed monetary policy over the recent period, and we reject that the Fed policy was/is optimal.