Carbon Taxes and Subsidies with Electrification
Abstract: This paper studies the effect of an economy-wide carbon tax when end-use decarbonization requires electrification. Given standard electricity pricing, an economy-wide carbon tax may not implement the planner’s allocation due to high electricity prices along the transition that limits end-use decarbonization. Implementation of optimal policy requires a cap or subsidy on the electricity price to avoid an overshooting of prices along the transition path. For a quantitative version of the model calibrated to the US and a $100 per ton carbon tax, cumulative emissions are 9.3% higher absent a policy that implements the efficient price.
Abstract: Using industry-level data and measures of supply conditions, we estimate the elas- ticity of retail price margins with respect to inventories along the retailer’s optimal pricing curve. We find that this elasticity is negative and statistically significant, con- sistent with higher retail price margins when retailers face greater costs of holding finished-good inventories. We then assess the implications of this channel for inflation dynamics within a New Keynesian Phillips curve (NKPC) framework that links inven- tories to retailers’ markup behavior. Incorporating the inventory-sales ratio into the NKPC markedly improves the model’s empirical fit and helps account for two notable recent inflation episodes: the missing disinflation of 2009–2011 and the COVID-era surge.
The Transition to Net Zero in a Small Open Economy (with Sauhard Srivastava)
Abstract: This paper examines the macroeconomic cost and implications of transitioning to net zero for a fossil-fuel dependent, small open economy. A net zero target operates as an anticipated negative productivity shock that lowers consumption, raises the current account surplus along the transition path, and has ambiguous effects on the real exchange rate. A transition to net zero appreciates the currency by lowering the import bill for fossil fuels, but depreciates the currency by making domestic tradables more expensive. We calibrate the model to the case of Japan and find that the transition to net zero lowers consumption by 0.2-2%.
How Should Monetary Policy Respond to Housing Inflation? (with Javier Bianchi and Alisdair McKay)
Revise and Resubmit, Quarterly Journal of Economics
Abstract: A persistent rise in rents has kept inflation above target in many advanced economies. Optimal policy in the standard New Keynesian model requires policy to stabilize housing inflation. We argue that the architecture of the New Keynesian model—based on the premise that excess demand is always satisfied by producers—is inappropriate for the housing market, and we develop a matching framework that allows for demand rationing. Our analysis shows that the optimal response to a housing demand shock is to stabilize inflation in the non-housing sector and disregard housing inflation. These findings hold exactly in a version of the model with costless search and quantitatively in a version with housing search costs calibrated to match US data on housing tenure, vacancy rates, and the size of the real estate sector.
The Macroeconomics of Net Zero
Abstract: This paper examines the macroeconomic cost and implications of transitioning to net zero emissions. The macroeconomic cost of achieving net zero is a combination of lower output due to higher energy prices and higher investment due to more costly technology. Along the transition path, a net zero target operates as both an anticipated negative productivity shock and a negative capital shock. Thus, for monetary policy, net zero is a negative aggregate demand shock that lowers the natural rate of interest. Using projected technology costs and net zero modeling scenarios, decarbonization of US electric power generation is estimated to cost less than 0.2% of steady state consumption.
Sectoral Shocks, The Beveridge Curve and Monetary Policy (with Dmitriy Sergeyev)
Abstract: The slow recovery of the US labor market and the observed shift in the Beveridge curve has prompted speculation that sector-specific shocks may be responsible for the current recession. We document a significant correlation between shifts in the US Beveridge curve in postwar data and periods of elevated sectoral shocks, relying on a factor analysis of sectoral employment to derive our sectoral shock index. We provide conditions under which sector-specific shocks in a multisector model augmented with labor market search generate outward shifts in the Beveridge curve and raise the natural rate of unemployment. Consistent with empirical evidence, our model also generates cyclical movements in aggregate matching function efficiency and mismatch across sectors. We calibrate a two-sector version of our model and demonstrate that a negative shock to construction employment calibrated to match employment shares can fully account for the outward shift in the Beveridge curve. We augment our standard multisector model with financial frictions to demonstrate that financial shocks or a binding zero lower bound can act like sectoral productivity shocks, generating a shift in the Beveridge curve that may be counteracted by expansionary monetary policy.
Related: Rhode Island Unemployment: Is There Labor Market Mismatch?
Press Coverage: Providence Journal (April 21, 2015); Brown Daily Herald (April 9, 2015); Providence Business News (March 23, 2015)
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