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Outlines 1 GEMMES Project 2 The Keen (1995) Model 3 Coping - - PowerPoint PPT Presentation

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T HE GEMMES RESEARCH PROGRAM Les Houches, Winter 2018 March 08, 2018 Gal Giraud #WorldInCommon AGENCE FRANAISE DE DVELOPPEMENT | FRENCH DEVELOPMENT March 08, 2018 #WolrdInCommon AGENCE FRANAISE DE DEVLOPPEMENT | FRENCH DEVELOPMENT

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March 08, 2018 #WolrdInCommon AGENCE FRANÇAISE DE DEVÉLOPPEMENT | FRENCH DEVELOPMENT AGENCY 0/45

#WorldInCommon

AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY

THE GEMMES RESEARCH PROGRAM

Les Houches, Winter 2018

March 08, 2018 Gaël Giraud

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Outlines

1 GEMMES Project 2 The Keen (1995) Model 3 Coping with the Collapse

Target achievements

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March 08, 2018 #WolrdInCommon AGENCE FRANÇAISE DE DEVÉLOPPEMENT | FRENCH DEVELOPMENT AGENCY 2/45

GEMMES

Overview of the research project GEMMES

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GEMMES

Overview of the research project GEMMES GEneral Monetary

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GEMMES

Overview of the research project GEMMES GEneral Monetary Multisectoral

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GEMMES

Overview of the research project GEMMES GEneral Monetary Multisectoral Macrodynamics

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GEMMES

Overview of the research project GEMMES GEneral Monetary Multisectoral Macrodynamics for the Ecological Shifts

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GEMMES

Overview of the research project GEMMES GEneral Monetary Multisectoral Macrodynamics for the Ecological Shifts

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GEMMES

Overview of the research project Goodwin

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GEMMES

Overview of the research project Goodwin Goodwin-Keen

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GEMMES

Overview of the research project Goodwin Goodwin-Keen Prices

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GEMMES

Overview of the research project Goodwin Goodwin-Keen Prices Banks

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GEMMES

Overview of the research project Goodwin Goodwin-Keen Prices Banks Inventories

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GEMMES

Overview of the research project Goodwin Goodwin-Keen Prices Banks Inventories Government

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GEMMES

Overview of the research project Goodwin Goodwin-Keen Prices Banks Inventories Government Speculation

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GEMMES

Overview of the research project Goodwin Goodwin-Keen Prices Banks Inventories Government Speculation Inequalities

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GEMMES

Overview of the research project Goodwin Goodwin-Keen Prices Banks Inventories Government Speculation Inequalities Multisectoral

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GEMMES

Overview of the research project Goodwin Goodwin-Keen Prices Banks Inventories Government Speculation Inequalities Multisectoral Climate feedback backloop

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GEMMES

Overview of the research project Goodwin Goodwin-Keen Prices Banks Inventories Government Speculation Inequalities Multisectoral Climate feedback backloop Open economy

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Outlines

1 GEMMES Project 2 The Keen (1995) Model 3 Coping with the Collapse

Target achievements

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The Keen (1995) Model

Private debt matters

myf.red/g/7Dv0

  • 4
  • 3
  • 2
  • 1

1 2 3 4 5 4.0 4.8 5.6 6.4 7.2 8.0 8.8 9.6 10.4 11.2 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 fred.stlouisfed.org Nonfinancial Business; Credit Market Instruments; Liability, Level/Gross Domestic Product (left) Civilian Unemployment Rate (right) % Chg. of (Bil. of $/Bil. of $) Percent

Figure: Change in private debt and employment rate in the United States – Period 1990-2010.

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The Keen (1995) Model

Private debt matters

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The Keen (1995) Model

Private debt matters

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The Keen (1995) Model

Overview of the model Since the financial crisis of 2007-2009, the ideas of Hyman Minsky around the intrinsic instability of a monetary market economy have experienced a signifi- cant revival.

  • 1. Goodwin (1967): Lotka-Volterra logic of the wage share and the employ-

ment rate.

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The Keen (1995) Model

Overview of the model Since the financial crisis of 2007-2009, the ideas of Hyman Minsky around the intrinsic instability of a monetary market economy have experienced a signifi- cant revival.

  • 1. Goodwin (1967): Lotka-Volterra logic of the wage share and the employ-

ment rate.

  • 2. Keen (1995): a Minsky moment can occur.
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The Keen (1995) Model

Overview of the model Since the financial crisis of 2007-2009, the ideas of Hyman Minsky around the intrinsic instability of a monetary market economy have experienced a signifi- cant revival.

  • 1. Goodwin (1967): Lotka-Volterra logic of the wage share and the employ-

ment rate.

  • 2. Keen (1995): a Minsky moment can occur.
  • 3. Investment financed by endogenous money creation (discussion with Nguyen-

Huu-Pottier (2017)).

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The Keen (1995) Model

The model λ: the employment rate. λ := L N .

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The Keen (1995) Model

The model λ: the employment rate. λ := L N . L: the labor force, and N: the total population. ˙ N N = β.

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The Keen (1995) Model

The model λ: the employment rate. λ := L N . L: the labor force, and N: the total population. ˙ N N = β. a: the labor productivity. ˙ a a = α.

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The Keen (1995) Model

The model λ: the employment rate. λ := L N . L: the labor force, and N: the total population. ˙ N N = β. a: the labor productivity. ˙ a a = α. w: the wage per worker, W = wL: the total wage, ω: the wage share ad Y: the production. ω = W Y = wL aL = w a

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The Keen (1995) Model

The model K: the stock of capital. ˙ K = I − δK.

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The Keen (1995) Model

The model K: the stock of capital. ˙ K = I − δK. The Leontief production function Y = min K ν , aL

  • =

K ν = aL.

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The Keen (1995) Model

The model D: the aggregate debt. ˙ D = I − Π. with Π := Y − W − rD: the real profit of the firm, and r: the interest rate. π: the profit-to-production ratio. π = Π Y .

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The Keen (1995) Model

The model D: the aggregate debt. ˙ D = I − Π. with Π := Y − W − rD: the real profit of the firm, and r: the interest rate. π: the profit-to-production ratio. π = Π Y . d: the debt-production ratio. d = D Y .

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The Keen (1995) Model

Aggregate behaviours

The Short-term Phillips Curve (Mankiw, 2010).

˙ w w = φ(λ).

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The Keen (1995) Model

Aggregate behaviours

The Short-term Phillips Curve (Mankiw, 2010).

˙ w w = φ(λ).

The Investment Function : it evolves positively with the profit share.

I Y = κ (π) .

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The Keen (1995) Model

The three-dimensional system One can retrieve the following set of equations: ˙ ω = ω [φ(λ) − α] ˙ λ = λ κ(π) ν − δ − α − β

  • ˙

d = d

  • r − κ(π)

ν + δ

  • + κ(π) − (1 − ω)
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The Keen (1995) Model

Aggregate behaviours

Phenomenological approach: φ(.) and κ(.) are empirically estimated. Sonnenschein-Mantel-Debreu (1975): emergence is possible. Agent-based model.

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The Keen (1995) Model

Equilibria analysis Two economically meaningful long run equilibria:

A good equilibrium locally stable:

◮ Positive employment rate and wage share, finite level of debt. ◮ Growth rate in line with the Solow or Harrod-Domar models.1 1The sum of the technical progress growth and the population growth.

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The Keen (1995) Model

Equilibria analysis Two economically meaningful long run equilibria:

A good equilibrium locally stable:

◮ Positive employment rate and wage share, finite level of debt. ◮ Growth rate in line with the Solow or Harrod-Domar models.1

A bad equilibrium locally stable:

◮ Employment rate and wage share collapsing, infinite level of debt. ◮ Situation of economic crisis. 1The sum of the technical progress growth and the population growth.

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Outlines

1 GEMMES Project 2 The Keen (1995) Model 3 Coping with the Collapse

Target achievements

Further Research

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Coping with the Collapse –

Physical processes overview

Real Output CO2 Emissions CO2 Accumulatjon Radiatjve Forcing Temperature Change Figure: Climate-economy interactions diagram.

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Coping with the Collapse –

Climate damage as a percentage of real GDP

0,0 0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8 0,9 1,0 1 2 3 4 5 6 Damages (fraction of output) Temperature increase (°C) Nordhaus Weitzman Dietz and Stern

Figure: Shape of various damage functions.

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Coping with the Collapse

Stock-flow consistency

Households Productive Sector Banks Sum Balance Sheet Capital stock pK pK Deposits Mh Mc −M Loans −Lc Lc Equities E −Ef −Eb Sum (net worth) Xh Xf = 0 Xb = 0 X Transactions current capital Consumption −pC pC Investment pI −pI

  • Acc. memo [GDP]

[pY] Wages W −W Capital depr. −(δ + DK)pK (δ + DK)pK Carbon taxes pTf −pTf

  • Int. on loans

−rcLc rcLc Bank’s dividends Πb −Πb Productive sector’s dividends Πd −Πd

  • Int. on deposits

rM Mh rM Mc −rM M Column sum (balance) Sh Sc −pI + (δ + DK)pK Sb Flow of Funds Change in capital stock p ˙ K p ˙ K Change in deposits ˙ Mh ˙ Mc − ˙ M Change in loans − ˙ Lc ˙ Lc Column sum (savings) Sh Sc Sb Change in equities ˙ Ef −(Sc + ˙ pK) Change in bank equity ˙ Eb −Sb Change in net worth Sh + ˙ E ˙ pK + p ˙ K

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Coping with the Collapse –

Dynamics and behavioural relations

Short term Phillips curve: ˙ w w = φ(λ) Dynamic of prices (Grasselli et al., 2014): ˙ p p = η(mc − 1) Investment behavior:

I = κ(π)

Population dynamics taken from the UN median scenario.

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Coping with the Collapse

Key modeling highlights Bridging climate and a global monetary economy

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Coping with the Collapse

Key modeling highlights Bridging climate and a global monetary economy

  • 1. The macroeconomic core

◮ Non-neutrality of money ◮ Severe breakdowns do not appear as “black swan events” ◮ Emissions, carbon price and abatement technology (Nordhaus, 2016) ◮ Price dynamics under imperfect competition (Grasselli et al., 2014) ◮ Sigmoïd pattern of the global workforce (UN population scenarios, 2015) ◮ Dividends payments

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Coping with the Collapse

Key modeling highlights Bridging climate and a global monetary economy

  • 1. The macroeconomic core

◮ Non-neutrality of money ◮ Severe breakdowns do not appear as “black swan events” ◮ Emissions, carbon price and abatement technology (Nordhaus, 2016) ◮ Price dynamics under imperfect competition (Grasselli et al., 2014) ◮ Sigmoïd pattern of the global workforce (UN population scenarios, 2015) ◮ Dividends payments

  • 2. The DICE climate feedback loop of Nordhaus (2016) refined with

◮ More convex damage functions (Weitzman, 2011) ◮ Allocation of environmental damages between output and capital (Dietz et al.,

2015)

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Coping with the Collapse

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 recessionary state?

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Coping with the Collapse

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 recessionary state?

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 to prevent such a situation?

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Coping with the Collapse

Main findings

In a business as usual scenario, climate change drives the global econ-

  • my toward a situation of “economic collapse”.

A price signal (carbon tax) provides indeed the right incentives to perform

the energy shift and 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.

There seems to be a link between the distribution of income and the eco-

nomic resilience towards climate change.

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Coping with the Collapse –

Convergence toward a steady-state absent climate change

0.0 0.2 0.4 0.6 0.8 1.0 2016 2050 2100 2150 2200 2250 0.0 0.5 1.0 1.5 2.0 2.5 Employment Rate Wage Share Inflation (in %, right axis) 2016 2050 2100 2150 2200 2250 1 2 3 4 0.0 0.5 1.0 1.5 2.0 Real Growth (in %) Private Debt Ratio (right axis) 2016 2050 2100 2150 2200 2250 2500 5000 7500 10000 50 100 150 200 250 Real Output Emissions (in GtCO2, right axis) 2016 2050 2100 2150 2200 2250 2 4 6 8 10 Atmospheric temperature

Figure: Trajectories of the main simulation variables.

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Coping with the Collapse –

Impact of temperature change on the solovian steady-state

Figure: Type 1 scenario. Figure: Type 3 scenario.

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Coping with the Collapse –

Viability analysis through the basin of attraction of the solovian steady-state

Figure: Baseline scenario. Figure: Type 1 scenario.

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Coping with the Collapse –

A need for public involvement

100 200 300 400 500 2016 2030 2050 2070 2100

Real Output

Scenarios Type 1 Type 2 Type 3

  • 2
  • 1

1 2 2016 2030 2050 2070 2100

Inflation Rate

Scenarios Type 1 Type 2 Type 3 2 4 6 8 10 2016 2030 2050 2070 2100

Emissions per Capita (GtCO2)

Scenarios Type 1 Type 2 Type 3 2016 2030 2050 2070 2100 0.00 0.75 1.50 2.25 3.00

Real Ouptut Growth

Scenarios Type 1 Type 2 Type 3 1 2 3 4 5 6 7 2016 2030 2050 2070 2100

Private Debt Ratio

Scenarios Type 1 Type 2 Type 3 1 2 3 4 5 2016 2030 2050 2070 2100

Mean Atmospheric Temperature Deviation

Scenarios Type 1 Type 2 Type 3

Figure: Trajectories of the main macroeconomic and climate variables.

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Coping with the Collapse –

Which temperature targets can be reached?

Nordhaus (2016) following a recalibration of the climate module of DICE:2

The study confirms past estimates of likely rapid climate change over the next century if there are not major climate-change policies. It sug- gests that it will be extremely difficult to achieve the 2◦C target of in- ternational agreements even if ambitious policies are introduced in the near term. The required carbon price needed to achieve current targets has risen over time as policies have been delayed.

Illustration:

1 2 3 4 1.5 3.1 4.5 6.0

Figure: Temperature increase in 2100 as a function of the climate sensitivity whenever zero net emission is reached in 2016 (blue line) or 2018 (red line).

2http://cowles.yale.edu/sites/default/files/files/pub/d20/d2057.pdf

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Coping with the Collapse –

Which shape for the carbon price (1/2)?

A generalized logistic path:

˙ pC pC = βpC

  • 1 − γpC

pC pBS

  • ,

with, βpC > 0, and 1 ≥ γpC ≥ −1.

Set of carbon price paths considered

100 200 300 400 500 2015 2050 2100 2150 2200

Parameters βpC = .5,γpC = -1 βpC = .5,γpC = 0 βpC = .5,γpC = 1 βpC = .05,γpC = -1 βpC = .05,γpC = 0 βpC = .05,γpC = 1

Figure: The carbon price for the boundaries conditions and included exponential cases.

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Coping with the Collapse –

Which shape for the carbon price (2/2)?

0.1 0.2 0.3 0.4 0.5

  • 1.0
  • 0.5

0.0 0.5 1.0

γpC βpC

4.0 °C 3.5 °C 3.0 °C 2.5 °C 2.0 °C

Figure: Heatmap in 2100 depending on the carbon price path in the Type 3 scenario (exponential case in the white line).

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Coping with the Collapse –

New achievements goals: +3◦C and +2.5◦C in 2100

100 200 300 400 500 2016 2030 2050 2070 2100

Real Output

Objective +3°C +2.5°C 1 2 3 4 5 6 7 2016 2030 2050 2070 2100

Private Debt Ratio

Objective +3°C +2.5°C 2 4 6 8 10 2016 2030 2050 2070 2100

Emissions per Capita (GtCO2)

Objective +3°C +2.5°C 2016 2030 2050 2070 2100 0.00 0.75 1.50 2.25 3.00

Real Output Growth

Objective +3°C +2.5°C 100 200 300 400 500 2016 2030 2050 2070 2100

Carbon Price (in 2010 US$)

Objective +3°C +2.5°C 2 4 6 8 10 2016 2030 2050 2070 2100

Mean Atmospheric Temperature Deviation

Objective +3°C +2.5°C

Figure: Trajectories of the main simulation variables for the Type 1 scenario compatible with policy objectives of +2.5◦C and +3◦C (in dashed line, the trajectories for the private debt ratio in the Type 3 scenario).

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Outlines

1 GEMMES Project 2 The Keen (1995) Model 3 Coping with the Collapse

Target achievements

Further Research

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Coping with the Collapse

Areas for further research

Endogenous technical progress. Substitution between capital and labour (McIsaac, 2018) Decoupling between demand and supply (Devrim et al.) Distinguish between various vintages of capital (Giraud and Lojkine, 2018) Endogenous population (de)growth (Victor Court et al., 2018) Empirical estimation of aggregate behavioural functions via polynomials

and non-Gaussian residuals (Vodouris)

Adding energy, minerals and other natural resources into the production

function (Rostom, 2018)

Adding expectations (Dosseto, 2018). The role of income and capital inequality (Giraud and Grasselli, 2017).

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Coping with the Collapse

Climate change induces significant losses

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Coping with the Collapse

Climate change induces significant losses

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Coping with the Collapse

Climate change induces significant losses

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Coping with the Collapse

Climate change induces significant losses

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Back to thermo

Georgescu-Roegen

Figure:

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Back to thermo

Useful work (generalization of mechanical work) Flix (2014)

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Back to thermo

Eric Herbert et alii. 2018

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Back to thermo

Eric Herbert et alii. 2018 Economy = Aggregate metabolism (dissipative structure) that extracts

ressources R, produces useful work, and rejects wastes, W.

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Back to thermo

Eric Herbert et alii. 2018 Economy = Aggregate metabolism (dissipative structure) that extracts

ressources R, produces useful work, and rejects wastes, W.

Ecosystem = Reservoir where R and W coexist.

µR := potential (chemical, exergetic...) of R in the ecosystem. µW := potential of W in the ecosystem. µR > µW (far from thermo equilibrium? Mallick (2014)). Virgo (2011).

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Back to thermo

Eric Herbert et alii. 2018 Economy = Aggregate metabolism (dissipative structure) that extracts

ressources R, produces useful work, and rejects wastes, W.

Ecosystem = Reservoir where R and W coexist.

µR := potential (chemical, exergetic...) of R in the ecosystem. µW := potential of W in the ecosystem. µR > µW (far from thermo equilibrium? Mallick (2014)). Virgo (2011).

M = metabolic rate = rate of conversion of R into useful work in the econ-

  • my.
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Back to thermo

Eric Herbert et alii. 2018 Economy = Aggregate metabolism (dissipative structure) that extracts

ressources R, produces useful work, and rejects wastes, W.

Ecosystem = Reservoir where R and W coexist.

µR := potential (chemical, exergetic...) of R in the ecosystem. µW := potential of W in the ecosystem. µR > µW (far from thermo equilibrium? Mallick (2014)). Virgo (2011).

M = metabolic rate = rate of conversion of R into useful work in the econ-

  • my.

˙

NR (resp. ˙ NW) = rate of flow of R (resp. W) across the “membrane” between the economic metabolism and the ecosystem.

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When econ and thermo meet:

˙ NR = DR(µR − µR) T M − M2 (1) µR := potential of the resource within the economic metabolism T := constant temperature (e.g., T= 287 K, Svirezhev (2000)) DR : diffusion parameter

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When econ and thermo meet:

˙ NR = DR(µR − µR) T M − M2 (1) µR := potential of the resource within the economic metabolism T := constant temperature (e.g., T= 287 K, Svirezhev (2000)) DR : diffusion parameter

In an ideal solution, chemical potential:

µX = µX0 + RT ln NX R = 8.31 JK −1mol−1 gas constant. NX: molar concentration.

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Any potential that is an increasing function of concentration.

T constant in the ecosystem (to be relaxed).

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Any potential that is an increasing function of concentration.

T constant in the ecosystem (to be relaxed).

  • ˙

NW = DW (µW −µW )

T

+ M DW > 0 (spontaneous rate of diffusion, even absent human work). Pollution = exergy left in our wastes (Ayres).

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Any potential that is an increasing function of concentration.

T constant in the ecosystem (to be relaxed).

  • ˙

NW = DW (µW −µW )

T

+ M DW > 0 (spontaneous rate of diffusion, even absent human work). Pollution = exergy left in our wastes (Ayres).

µR > µR = µR − MT DR

> µW = µW + MT

DW

> µW

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Total entropy produced by the economic metabolism per unit of R con-

verted into W:

dΣ = µR − µW T (2) = µR − µW T − Mk (3)

with k :=

1 DR + 1 DW .

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Total entropy produced by the economic metabolism per unit of R con-

verted into W:

dΣ = µR − µW T (2) = µR − µW T − Mk (3)

with k :=

1 DR + 1 DW . Mmax = µR−µW kT

⇒ dΣ = 0. No useful work. Converting R to W faster than Mmax would require work to be done rather than being a source of work. (generalization of EROI). Virgo (2011), Odum and Pinkerton (1955).

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Total entropy produced by the economic metabolism:

dS := MdΣ = µR − µW T M − kM2.

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Total entropy produced by the economic metabolism:

dS := MdΣ = µR − µW T M − kM2.

Conversely, µR − µW = MkT ⇒ dΣ = dS = 0. No useful work either.

  • Cf. Eric Herbert et alii.
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“Red Queen” effect.

Lewis Caroll, Leigh van Valen (1973).