Greenhouse abatement policy: insights from the G-cubed multi-country model

The third meeting of the Conference of the Parties of the Framework Convention on Climate Change held in Japan last December was a lost opportunity to set a realistic policy framework for addressing climate change in the coming decades. A number of countries proposed targets for greenhouse emissions, to be reached by a target date. The outcome was a range of different targets for each country. Analysis with the G‐cubed multi‐country model suggests that fixed targets are a costly way to address climate change. The extent of potential cost suggests the agreement will eventually fail. A better way to address climate change is to focus on uniformity in policy instruments that deliver differentiated outcomes rather than focus on differentiated policy settings.Resource /Energy Economics and Policy,

The effects of fiscal consolidation in the OECD

Despite the current recession in many parts of the OECD, fiscal consolidation is likely in many OECD economies in the 1990s. The author asks: is fiscal consolidation in the OECD in a period of low growth a recipe for global stagnation? In particular, what effects are likely in developing countries? The author starts with an overview of cuts in the U.S. fiscal deficit proposed by the Clinton administration and the extent to which European governments must cut fiscal deficits between now and 1997 to satisfy deficit targets in the Maastricht Treaty. How changes in fiscal policy are transmitted within an economy and between that economy and the rest of the world depends on whether those changes lead to permanent or temporary changes in government saving; whether they are implemented through government spending or taxes; and whether the taxes fall on households or firms. The main channels of transmission are through changes in: agents'expectations about future taxes, interest rates, exchange rates, and economic activity. The author uses the MSG2 multicountry models to quantify the ramifications of those changes. He concludes, among other things, that fiscal contraction in the OECD will probably lead to slower growth over the next several years. But the current and likely paths of fiscal policy are such that deficit reduction programs may have stimulating effect in the short run, as long as future fiscal contraction is credible. And fiscal deficit reduction will probably increase long-run output in the OECD through its effects on savings and investment. Finally, growth in the developing countries (at least total growth) may not be impaired at all by fiscal consolidationin the OECD. The negative effects of fiscal contraction will occur through lower net exports of non-OECD economies. For developing countries with open capital markets, the initial reduction in demand through lower exports can be offset by the reduction in interest rates following an inflow of capital from the countries with contracting fiscal policy. A significant decline in real global interest rates is likely to increase growth in developing countries that are debt-constrained, either directly (through private capital inflows) or indirectly (by relaxing the balance of payments constraint, allowing more resources to be channeled to domestic investment needs).Economic Theory&Research,Economic Stabilization,Environmental Economics&Policies,Banks&Banking Reform,Macroeconomic Management

The East Asian crisis : investigating causes and policy responses

The authors identify as the primary cause of the East Asian crisis a fundamental reassessment of the profitability of investments in the region. They identify a number of secondary shocks as well, including interest risk premia, monetary expansion, and declines in output brought about by failures of the financial market. Unlike the Latin American crisis of the 1980s, the East Asian crisis did not reflect commodity price shocks, large changes in world interest rates, fiscal imbalances, or inflationary shocks. It involved large-scale borrowing abroad, but by the private sector rather than the government - andfor the normally well-regarded purpose of funding capital investment. It seems unlikely that terms of trade shocks or changes in exchange rates due to pegging to the dollar could, alone, have caused an adjustment crisis of this magnitude - although they could have helped trigger the crisis. More important, expectations of future growth in returns to the corporate sector began to fall. Declines in asset valuations caused major shifts in investment portfolios, and the consequences of asset market shocks were compounded by secondary shocks associated with the abrupt shift to floating rates, concerns about the credibility of government policies, weaknesses in financial sectors, and inadequacies in the mechanisms for corporate restructuring and liquidation. The authors use of forward-looking modeling framework to capture some of the major interactions between asset markets, output, and trade in the countries worst hit by the crisis. They find that the model is able to capture the main features of the crisis.Environmental Economics&Policies,Economic Theory&Research,Payment Systems&Infrastructure,Fiscal&Monetary Policy,International Terrorism&Counterterrorism,Economic Theory&Research,Environmental Economics&Policies,Economic Stabilization,Macroeconomic Management,Banks&Banking Reform

Climate change policy for India

Revised Draft 30 April 2004. This was prepared for the Conference to celebrate 10 Years of ASARC to be held at the ANU April 27-28.While the global environment waits for the world to reach some form of agreement on climate policy, developing countries such as India are entering a phase of higher economic growth. The decisions on investment in energy systems that will be made in India in coming years will have an important impact on global climate change over the coming century. This paper explores how action could be undertaken in India today, in a way that commits India to longer run goals for greenhouse emissions but does not raise the short run cost to the development process in India. The approach proposed is a modification of the McKibbin- Wilcoxen Blueprint for climate policy which relies on establishing property rights and markets in both short term and long term emission permits. The goal is to encourage long term investment decisions to move towards less carbon intensive activities. This approach could be unilaterally implemented in India. If successful it would not only reduce Indian carbon emissions but it would be an example for the entire developing world to follow and it might remove a key obstacle preventing the United States from implementing policies based on the argument that developing countries are not committed to taking action to reduce greenhouse emission. This paper outlines the recent history and prospects for carbon emissions in India. It also explores the various alternative economic instruments that might be used. The paper presents illustrative results for the consequences of a rise in the price for carbon in India based on a new version of the G-Cubed multi-country model that includes India. This simulation illustrates that an immediate increase in the price of carbon either through taxes or from entering a Kyoto style permit trading market could be very costly for India. Thus a credible commitment such as would be possible under the Blueprint is the best way to change investment incentives in India while at the same time give India time to develop before contributing to the cost of global greenhouse abatement

Coordination of Monetary and Fiscal Policies in the OECD

Discontent with the functioning of the world monetary system has led to many proposals for international monetary reform. These proposals range from enhanced consultations under the current regime of floating exchange rates to a regime of fixed exchange rates, as proposed by Ronald McKinnon. In this paper we examine the implications of several alternative monetary arrangements for fiscal policy in the world economy. In particular we focus upon two issues. The first is the effects of alternative monetary arrangements on the international transmission of fiscal policy. The second is the implications of the alternative regimes for strategic aspects of fiscal policymaking.As is generally the case in the discussion of exchange regimes we find that the choice of the monetary system is crucially dependent upon the source and nature of the shocks hitting the world economy. In this paper we show that the monetary regime also has important implications for the transmission offiscal policy in the world economy and for the nature of the strategic games played by fiscal authorities. Rigid rules of the game, as under fixedexchange rates, do not necessarily eliminate the inefficient equilibriathat can occur when fiscal authorities behave non-cooperatively.

The potential impact of the global financial crisis on world trade

This paper models the global financial crisis as a combination of shocks to global housing markets and sharp increases in risk premia of firms, households and international investors in a global economic model. The model has six sectors of production and trade in 15 major economies and regions. The paper shows that the shocks observed in financial markets can be used to generate the severe economic contraction in global trade and production experienced in 2009. In particular the distinction between the production and trade of durable and non durable goods plays a key role in explaining the much larger contraction in trade than GDP experienced by most economies. The paper explores the implications of the large increase in fiscal deficits and the implications of a global trade war in response to the financial crisis.Economic Theory&Research,Debt Markets,Emerging Markets,Banks&Banking Reform,Labor Policies

MODELLING GLOBAL DEMOGRAPHIC CHANGE:RESULTS FOR JAPAN

In earlier papers (McKibbin and Nguyen (2001, (2002)) we introduced demographic features into the MSG3 model of the world economy, following the approach of Bryant and McKibbin (2001). In this paper we use the same theoretical technique to develop a series of models based on a consistent database from a simple two country symmetric theoretical model to the complete 4 country MSG3 model, which represents the empirical characteristics of Japan, United States, Rest of OECD and Rest of World. We explore a stylized decline in fertility similar to that experienced by Japan since the 1950 (exactly the same shock as the stylized shock used in Bryant (2004)). We first explore the properties of the theoretical model with both a global and a single country shock. This gives similar results to that found in the basic framework underlying the Bryant (2004) approach. We then move from the simplest fully optimizing framework to increasing add complexity to the model until we build a model of Japan. We explore the same shock across the models of increasing complexity in this paper and compare our results to the Bryant approach. We find that although the basic insights from the sequences of theoretical papers in the Brooking-ANU project continue to hold, the quantitative results change significantly as the model is adapted to have more characteristics of Japan. In a final section, we use the complete model to explore the likely impacts on Japan of the demographic change already experienced from 1970 and look to the likely changes to be experienced out to 2040.