Environmental Macroeconomics

Permit Trading Frictions, Co-Pollutants, and the Case for Cap-and-Trade  with MinJung Kwak

Abstract

We develop an over-the-counter emissions trading model featuring intermediaries, search and bargaining frictions, firm-specific abatement costs, and localized co-pollutant damages. Permit prices, trading volume, and emissions distribution arise endogenously. We examine how market microstructure, abatement cost heterogeneity, and damage functions shape equilibrium outcomes. Contrary to Weitzman (1974), our model shows that cap-and-trade can outperform a carbon tax. The key reason is that trading frictions in the permit market compress the dispersion of emissions across firms, thereby reducing total damages from local co-pollutants. Calibrated to EU ETS data, the model predicts that optimizing dealer availability reduces deadweight loss to 83% of that under a uniform EU-wide carbon tax, given benchmark values for the discount rate and local environmental damage coefficients.

Long-Run Economic Impacts of Climate Variability  with Sungwon Lee

Abstract

We estimate long-run economic impacts of climate volatility by employing a stochastic frontier model where climate volatility is additionally included into the production frontier. Our climate panel dataset covers 157 countries over the period 1950-2014. We find that both temperature and precipitation affect production possibilities in a hump-shaped way. Most importantly, temperature volatility turns out to reduce long-term potential output. This negative effect is found to be statistically significant, and various robustness checks, including income as well as temperature  heterogeneity across nations, confirm it. We also find short-term weather anomalies, either temperature or precipitation, are found to be insignificant across all specifications. Our findings provide supporting empirical evidence for a growing body of Integrated Assessment Model literature, emphasizing the role of uncertainty about global temperature dynamics. 

Monetary Economics

Central Bank Interventions and Liquidity in the Treasury Market (and beyond)  with Athanasios Geromichalos, Ioannis Kospentaris, Changhyun Lee, Sukjoon Lee

Abstract

Central banks around the world routinely engage in asset purchases in secondary markets as part of implementing monetary policy or enhancing market liquidity, but the effects of such interventions are not yet fully understood. We develop a multi-asset general equilibrium model in which the liquidity of an asset is endogenous and depends on the terms of trade in each asset's respective secondary market, which are, in turn, driven by agents’ market entry decisions and the possibility of central bank intervention. We use our model to qualitatively and quantitatively rationalize the superior liquidity of U.S. Treasuries over corporate bonds of comparable safety. Our model highlights and quantifies an unexplored link between fiscal and monetary policy: central bank interventions in the market for Treasuries increase secondary market liquidity for these securities, thus indirectly aiding the Treasury to borrow at lower rates. Our results also reveal that central bank interventions can have spillover effects on markets where the bank does not participate, offering a cautionary note to both policymakers and empirical researchers.