GEMMES R ESEARCH PROJECT An example: Coping With Collapse March 7, 2019 Florent Mc Isaac–mcisaacf@afd.fr French Development Agency–Agence Française de Développement #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT March 7, 2019 #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 0/69 AGENCY
� Outline 1 Introduction and motivation 2 The stock flow consistent approach 3 Coping with Collapse The macroeconomic core The climate module Scope of analysis Scenario analysis March 7, 2019 #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 1/69
� GEMMES research program Modeling as a tool for public policy dialogue � The "General Monetary and Multisectoral Macrodynamics for the Ecolog- ical Shift" (GEMMES) project aims to contribute to national and interna- tional debate around the transition to a low-carbon economy. � To do so, we build a sequence of models encompassing the relevant dy- namics in partnership with local institutions (ministries and academia) as well as international partners (World Bank, ILO, think tanks). � Modeling structures the debate by: ◮ feeding from quantitative and qualitative approaches ◮ allowing for model comparison � Hence modeling needs ◮ to be descriptive and not normative ◮ to be a tool for analysis and not the response ◮ to be pluralistic and multidisciplinary and not monolithic March 7, 2019 #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 2/69
� Fundamental vision behind the GEMMES project 1 . Climate change requires an immediate response. 2 . The low-carbon transition implies de facto a socio-economic restructura- tion of our economies. 3 . Finance-climate-economy interactions are non-trivial and are thus to be accounted for. 4 . The public sector has a fundamental role to play to steer and shape the transition, in coordination with the private sector. 5 . We take a holistic approach to sustainability, that is financial, environmen- tal and social. March 7, 2019 #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 3/69
� Outline 1 Introduction and motivation 2 The stock flow consistent approach 3 Coping with Collapse The macroeconomic core The climate module Scope of analysis Scenario analysis March 7, 2019 #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 4/69
� Money and finance misrepresentation: implications Failing to understand the endogenous nature of bank money leads to un- derestimate the sources of financial instability and the consequences of shocks hitting the banking sector. [Benes et al., 2014] Failing to understand the nature and functioning of public money leads to log- ically inconsistent conclusions about fiscal and macro-prudential poli- cies . SFC models can help to provide a fully integrated picture of the real and financial economy , tackling the endogenous nature of money. March 7, 2019 #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 5/69
� Stock-flow modeling framework In a monetary economy, sectors are interconnected through multi-layered bal- ance sheets. Therefore, a modeling framework based on: � A rigorous accounting framework, based Copeland’s (1949) quadruple entry system. � A complex economic system with consistent feedback-loop between real and financial spheres � Possible economically unstable emergent trajectories. March 7, 2019 #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 6/69
� Quadruple entry - Example of public spending financed directly by the central bank HH Prod. Banks Gov. C.B. Sum +G -G 0 Dep. Gov. +Y -Y 0 GDP - ∆ H b - ∆ H g + ∆ H 0 ∆ M0 - ∆ M h - ∆ M f + ∆ M 0 ∆ Dep + ∆ B - ∆ B cb 0 ∆ Bond 0 0 0 0 0 0 Dum March 7, 2019 #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 7/69
� Quadruple entry - Example of public spending financed directly by banks HH Prod. Banks Gov. C.B. Somme +G -G 0 M0 +Y -Y 0 GDP ∆ M0 - ∆ M h - ∆ M f + ∆ M - ∆ M g 0 ∆ Dep - ∆ B b + ∆ B 0 ∆ Bond. 0 0 0 0 0 Somme March 7, 2019 #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 8/69
� Example of matrices for Keen (1995) March 7, 2019 #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 9/69
� The equations: 2 steps 1. The accounting identities All the identities and flows implied by the accounting e.g. for firms (F= total profit) (1) Π = C + I − WL − iD ˙ (2) M = WL + iM − C 2. The behavioral equations: economic theory comes into play The closure : through theory we try to find an equation for each variable not directly determined by the accounting making theoretical assumptions on the behavior of the sectors. (3) C = sWL I = K ( µ 0 + µ 1 w − µ 2 d + µ 3 u e ) (4) March 7, 2019 #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 10/69
� Example: Bank of England Model [Burgess et al., 2016] From the Stockton Report Consider creating a forecast with an extended horizon beyond the current three-year period: a horizon of sufficient length to allow consideration of the development and likely unwinding of major economic and financial imbalances � The building up of financial imbalances contributed to the financial crisis and ensuing Great Recession � If we’d been looking further ahead than two years, we might have seen this coming � We are building a new dynamic macroeconomic model of financial bal- ances for the United Kingdom using flow of funds data from 1997 to the present. � The model contains six sectors: households, private non-financial com- panies, the government, banks, insurance companies and pension funds, and a simplified rest of the world. March 7, 2019 #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 11/69
� Transaction-Flow Diagram March 7, 2019 #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 12/69
� Outline 1 Introduction and motivation 2 The stock flow consistent approach 3 Coping with Collapse Introduction Related Literature Modeling set-up The macroeconomic core The climate module Target achievements Modeling uncertainty Climate prospective Scope of analysis Scenario analysis Concluding remarks March 7, 2019 #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 13/69
� Outline 1 Introduction and motivation 2 The stock flow consistent approach 3 Coping with Collapse Introduction Related Literature Modeling set-up The macroeconomic core The climate module Target achievements Modeling uncertainty Climate prospective Scope of analysis Scenario analysis Concluding remarks March 7, 2019 #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 14/69
� Introduction Publications Coping With Collapse, Ecological Economics, Volume 147, 2018, Pages 383-398. Debt and damages: What are the chances of staying under the 2C warming threshold? International Economics Volume 155, October 2018, Pages 92-108. Carbon Pricing and Global Warming, AFD Research Papers, 2018 March 7, 2019 #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 15/69
� Introduction Research questions � Combine two sources of global instabilities, climate and finance, in a min- imal dynamic framework to perform a prospective analysis. Can climate change drive the global economy in a deep recession? � Provide guidance for the implementation of public policy objectives in or- der to ensure economic stability and perform the energy shift. Is a price signal sufficient? � Cope with climate as well as economic uncertainties in order to have a deeper understanding of our chances to meet to Paris Agreement’s objectives. What are our chances to stay below +2 ◦ C? March 7, 2019 #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 16/69
� Introduction Main findings � In a business as usual scenario, climate change drives the global econ- omy towards a situation of “economic collapse.” � A price signal (carbon tax) provides indeed the right incentives to avoid most of climate damages. � However, financial risks are not entirely precluded: in line with the Stern- Stiglitz report (2017), a green public intervention is required to tackle both instabilities. � Our chances to achieve the Paris Agreement target stay, at most, below 25 % . March 7, 2019 #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 17/69
� Outline 1 Introduction and motivation 2 The stock flow consistent approach 3 Coping with Collapse Introduction Related Literature Modeling set-up The macroeconomic core The climate module Target achievements Modeling uncertainty Climate prospective Scope of analysis Scenario analysis Concluding remarks March 7, 2019 #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 18/69
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