maintaining low inflation money interest rates and policy stance abstract this paper presents a systematic empirical relationship between money and subsequent prices and output using us euro area and swiss data since the 1960 1970s monetary developments unlike interest rate stance measures are shown to provide qualitative and quantitative information on subsequent inflation the usefulness of monetary analysis is contrasted to weaknesses in modeling monetary policy and inflation with respectively short term interest rates and real activity measures the analysis sheds light on the recent change in inflation volatility and persistence as well as on the phillips curve flattening and reveals drawbacks in pursuing a low inflation target without considering monetary aggregates

is there a role for monetary aggregates in the conduct of monetary policy abstract we examine the potential policy role of monetary aggregates by attempting to use them as effectively as possible in the analysis of empirical relationships we focus on their role as information variables since any more ambitious use such as in a policy rule would presuppose some information content in the aggregates our results show that in the united states since 1979 the monetary aggregates fall considerably short of those requirements and results with german m3 are hardly more favorable we also investigate whether empirical relationships are not reflective of information relationships because of the use of these variables in countercyclical policy the results are not consistent with that interpretation

inflation and welfare in a monetary economy it is in everyone s private interest to try to get someone else to hold non interest bearing cash and reserves but someone has to hold it all so these efforts must simply cancel out all of us spend several hours per year in this effort and employ thousands of talented and highly trained people to help us these person hours are simply thrown away wasted on a task that should not have to be performed at all

money income prices and interest rates including data from the 1980s sharply weakens the postwar time series evidence indicating significant relationships between money however defined and nominal income or between money and either real income or prices separately focusing on data from 1970 onward destroys this evidence altogether evidence indicating cointegration of real income and real money balances with due allowance for the effect of interest rates also deteriorates when the sample extends through the 1980s a positive finding is that the spread between the commercial paper rate and the treasury bill rate consistently contains highly significant information about future movements in real income copyright 1992 by american economic association

reconsidering the role of money for output prices and interest rates abstract new keynesian models of monetary policy downplay the role of monetary aggregates in the sense that the level of output prices and interest rates can be determined without knowledge of the quantity of money this paper evaluates the empirical validity of this prediction by studying the effects of shocks to monetary aggregates using a vector autoregression var shocks to monetary aggregates are identified by the restrictions suggested by new keynesian monetary models contrary to the theoretical predictions shocks to broad monetary aggregates have substantial and persistent effects on output prices and interest rates

the dynamics of investment projects evidence from peru abstract we analyse the effect of commodity price cycles on firm investment decisions at the project level by considering the decision to delay cancel or complete a project as initially announced in particular we use logit and duration models of competing risks on a novel dataset of announced investment projects in peru from different economic sectors the empirical framework for the timing of investment is motivated by real option models for projects that take time to build with commodity prices used as a proxy of expected future income and their volatility as a proxy for uncertainty our results suggest that both a reduction in commodity prices and a reduction in their volatility increase the probability to delay investment in the mining sector this result is in line with a number of real option models with time to build in other sectors delays in implementation occur more often in periods of high volatility probability regressions under a competing risk framework suggest that higher commodity prices lead to a higher probability of completion in all sectors of the economy

small distributed generation versus centralised supply a social cost benefit analysis in the residential and service sectors abstract this paper aims at measuring the social benefits of small chp distributed generation dg in the residential and service sectors we do this by comparing the social costs of decentralised and centralised supplies simulating ideal situations in which any source of allocative inefficiencies is eliminated this comparison focuses on assessing internal and external costs the internal costs are calculated by simulating the optimal prices of the electricity and gas inputs the external costs are estimated by using and elaborating the results of the dissemination process of the externe project one of the most recent and accurate methodologies in this field the analysis takes into account the main sources of uncertainty about the parameter values including uncertainty about external cost estimations despite these sources of uncertainty the paper concludes that centralised supply is still preferable to small dg in fact the overall range of dg social competitiveness is restricted even considering further remarkable improvements in dg electrical efficiency and investment costs the results are particularly unfavourable for the residential sector whereas in the service sector the performance of dg technologies is slightly better

direct effects of base money on aggregate demand theory and evidence abstract meltzer the transmission process working paper carnegie mellon university 1999a shows that real monetary base growth is a significant determinant of consumption growth in the us controlling for the short term real interest rate in this paper i show that the same property of base money holds for total output relative to trend or potential in both the us and the uk the standard optimizing is lm model cannot account for this result but i show that it can once the long term nominal interest rate is included in the money demand function because the long term real rate matters for aggregate demand the presence of the long term nominal rate in the money demand function increases the effect of nominal money stock changes on real aggregate demand when prices are sticky

the macroeconomy of angola breaks and persistence in angolan macro data using long range dependence techniques we examine the order of integration of angola s macro variables from a fractional viewpoint based on a small open economy model the series examined are money reserves credit money supply lending rate exchange rates cpi gdp oil revenues and government expenditure for the period of january 2000 to december 2013 the results suggest that the variables are nonstationary with orders of integration equal to or higher than 1 suggesting nonmean reverting behaviour structural breaks reveal that the series reflect the imf intervention in angola in 2003 to control inflation policy implications are derived

another look at long run money demand abstract this paper investigates the long run demand for m1 in the postwar united states previous studies based on data ending in the late 1980s are inconclusive about the parameters of postwar money demand this paper obtains precise estimates of these parameters by extending the data through 1996 the income elasticity of money demand is approximately 0 5 and the interest semi elasticity is approximately 0 05 these parameters are significantly smaller in absolute value than the corresponding parameters for the prewar period a caveat is that the analysis assumes there is no trend in money demand resulting from technological change

solution and estimation of re macromodels with optimal policy macro models of monetary policy typically involve forward looking behavior except in rare circumstances we have to apply some numerical method to find the optimal policy and the rational expectations equilibrium this paper summarizes a few useful methods and shows how they can be combined with a kalman filter to estimate the deep model parameters with maximum likelihood simulations of a macro model with staggered price setting interest rate elastic output and optimal monetary policy illustrate the properties of this estimation approach

inflation forecast targeting implementing and monitoring inflation targets abstract inflation targeting is shown to imply inflation forecast targeting the central bank s inflation forecast becomes an explicit intermediate target inflation forecast targeting simplifies both implementation and monitoring of monetary policy the weight on output stabilization determines how quickly the inflation forecast is adjusted towards the inflation target money growth or exchange rate targeting is generally inferior than inflation targeting and leads to higher inflation variability commitment to target rules may be better than commitment to instrument rules

terms of trade uncertainty and economic growth abstract this paper examines a stochastic endogenous growth model in which terms of trade uncertainty affects savings and growth the model explains the well known positive link between growth and the mean rate of change of terms of trade and predicts also that terms of trade variability affects growth increased terms of trade variability results in faster or slower growth depending on the degree of risk aversion but in either case it reduces social welfare these growth effects imply that welfare costs of macroeconomic uncertainty are much larger than first thought cross country panel regressions provide strong support for the model s key predictions

tobin s imperfect asset substitution in optimizing general equilibrium in this paper we present a dynamic optimizing model that allows explicitly for imperfect substitutability between different financial assets this is specified in a manner which captures tobin s 1969 view that an expansion of one asset s supply affects both the yield on that asset and the spread or risk premium between returns on that asset and alternative assets our estimates of this model on u s data confirm that some of the observed deviations of long term rates from the expectations theory of the term structure can be traced to movements in the relative stocks of financial assets the richer aggregate demand and asset specifications imply that there exists an additional channel of monetary policy our results suggest that central bank operations exercise a modest influence on the relative prices of alternative financial securities and so exert an extra effect on long term yields and aggregate demand separate from their effect on the expected path of short term rates

real money balances and the timing of consumption an empirical investigation this paper examines the correlation between changes in consumer spending on nondurables and services and levels or changes in a variety of other variables that might be expected to enter directly as arguments of the household utility function or to serve as measures of household liquidity empirical results strongly suggest that an increase in real money balances raises the marginal utility of consumption once the influence of real balances is accounted for there is little evidence that other variables have a direct impact on the timing of consumption

volatility and a century of energy markets dynamics how similar is the price behavior of oil natural gas and coal are there any interactions among these three fuel prices and their volatilities using the yatchew and dimitropoulos 2016 annual data for the united states over the period from 1870 to 2014 and state of the art econometric methodology we explore for spillovers and interactions among the three energy markets in doing so we use a range of univariate and multivariate volatility models the key contribution to the literature is the estimation of a trivariate bekk model that allows for the interdependence of oil natural gas and coal returns and volatilities using the longest span prices that have ever been studied before

money does granger cause output in the bivariate money output relation abstract a bivariate granger causality test on money and output finds statistically significant causality when data are measured in log levels but not when they are measured in first differences of the logs bootstrap simulation experiments indicate that most probably the first difference results reflect lack of power whereas the level results reflect granger causality that is actually in the data the reason for the lack of power in the first difference f statistic is that first differencing the data appears to entail a specification error by showing that money does granger cause output in the bivariate relation we remove a potential embarrassment for models that assign an important role to money in business fluctuations

social choice uncertainty about external costs and trade off between intergenerational environmental impacts the emblematic case of gas based energy supply decentralization abstract the performance of the small natural gas fired power technologies has improved remarkably over the last decade this has aroused the interest of operators regulators and legislators in natural gas fired distributed generation gas fired dg namely the integrated or stand alone use of small modular gas fired power generation close to the point of consumption as an alternative to large power generation and electricity transport over long distances gas fired dg can provide an important benefit from the environmental point of view customer proximity in fact greatly increases the potential for combined heat and power generation involving energy saving and reduced greenhouse gas ghg emissions unfortunately this kind of decentralized supply also determines higher non ghg emissions mainly nox compared to the best available central power technology which occur in urban areas high populated instead of extra urban areas where large power plants are generally located it is therefore difficult to make a reliable evaluation of gas fired dg environmental benefits without comparing centralized and decentralized models in terms of external costs that is without an analysis which allows us to compare the extent of global and local regional impacts in terms of monetary damage if on the one hand this underlines the potential importance of the methods adopted to assess the economic value of environmental externalities even for policy decisions that are binary i e the choice between different energy technologies on the other it raises the crucial question of the uncertainty about the economic estimates this article aims at demonstrating that the uncertainty about external costs even if large does not undermine the possibility of verifying whether gas fired dg is preferable or not to centralized supply the paper compares centralized and decentralized models in terms of the external environmental costs which are calculated by using the results of the available studies in this field in particular the results of the dissemination process of the so called externe project one of the most recent and accurate methodologies and the results of a meta analysis with regard to the marginal cost of ghg emissions the uncertainty about external costs is substantial but not so large that it is not possible to say anything about the environmental raking of alternative technology solutions involving trade off between the impacts of different pollutants or between different kinds of impacts the literature on external costs provides several studies accounting for a large part of uncertainty by means of appropriate statistical and sensitive analysis by using and elaborating these results the analysis described in this paper seems to support the conclusion that centralized supply and especially the completely electric solution based on the reversible electric heat pump is still preferable to natural gas fired chp distributed generation this is not a definitive conclusion but we hope a useful scientific based contribution for policy decisions under the state of the art in fact this result has an interesting policy implication it suggests unless questioning the current enthusiasm on natural gas fired chp distributed generation deployment e g the european commission is indeed advocating dg as a contribution to ghg emission reduction and helps us to reflect upon gas fired dg supporting environmental policies which focus on the reduction of ghg emissions and totally disregard the possible trade off between the impacts of global and local regional pollutants unless one denies the rationality attributed to making tradeoffs on the basis of ethical limits of economic valuations even in this case however cost benefit analysis seems to be legitimate and a necessary step of the public discourse we think that the results of this paper are emblematic from this point of view

on money and output is money redundant abstract there is an emerging consensus that money can be largely ignored in making monetary policy decisions rudebusch and svensson 1999 policy rules and inflation targeting in taylor j b ed monetary policy rules university of chicago press chicago 203 246 2002 eurosystem monetary targeting lessons from us data european economic review 46 417 442 provide some empirical support for this view we reconsider the role of money and find that money is not redundant more specifically there is a significant statistical relationship between lagged values of money and the output gap even when lagged values of real interest rates and lagged values of the output gap are accounted for we also find that inside and outside money provide significant information in predicting movements in the output gap

direct effects of money on aggregate demand another look at the evidence now that a number of central banks are faced with short term nominal interest rates close to or at the zero lower bound there is a renewed interest in the long running debate about whether or not changes in the stock of money have direct effects in particular do changes in money have additional effects on aggregate demand outside of those induced by changes in short term nominal interest rates this article revisits and reinterprets the empirical evidence based on single equation regressions which is quite mixed with some results supporting and other results denying the existence of direct effects we use a structural model with no direct effects of money to show that the finding of positive and statistically significant coefficients on real money growth can be misleading the model generates data that when used to estimate analogues of the empirical regressions produce positive and statistically significant coefficients on real money growth similar to those often found when using actual data the

an optimizing is lm specification for monetary policy and business cycle analysis we ask whether relations of the is lm type can sensibly be used for the aggregate demand portion of a dynamic optimizing general equilibrium model intended for analysis of issues regarding monetary policy and cyclical fluctuations the main result is that only one change the addition of a term regarding expected future income is needed to make the is function match a fully optimizing model whereas no changes are needed for the lm function this modification leads to a dynamic forward looking model of aggregate demand that is tractable and usable with a wide variety of aggregate supply specifications theoretical applications concerning price level determinacy and gradual price adjustment are included

an alternative explanation of the price puzzle abstract this paper proposes an explanation for the frequent appearance of a price puzzle in vars designed for monetary policy analysis it assumes that the data are generated by a model in which output and output gap are not equivalent while an econometrician follows the common practice of including only output in the var the omission of the output gap is shown to spuriously produce a price puzzle and several other incorrect conclusions in a class of commonly used models this can happen even if the model admits a triangular identification and if the forecasts produced by the misspecified var are optimal when the model is tested on us data all predictions are supported a commodity price index is not needed to solve the puzzle

the robustness and efficiency of monetary policy rules as guidelines for interest rate setting by the european central bank abstract this paper examines the implications of recent research on monetary policy rules for practical monetary policy making with special emphasis on strategies for setting interest rates by the european central bank ecb the paper draws on recent research and new simulations of a large open economy model to assess the efficiency of a simple benchmark rule in comparison with other proposed rules further it stresses new results on the robustness of monetary policy rules in which each rule that is optimal or good according to one model or researcher is tested for robustness by other researchers using different models because of the large increase in the number of economists focussing on econometric evaluation of monetary policy rules for the interest rate instrument and because of the parallel increase in the variety of models being developed for this purpose much more evidence is becoming available on the robustness of simple monetary policy rules for the interest rate than ever before

money s role in the monetary business cycle a small structural model of the monetary business cycle implies that real money balances enter into a correctly specified forward looking is curve if and only if they enter into a correctly specified forward looking phillips curve the model also implies that empirical measures of real balances must be adjusted for shifts in money demand to accurately isolate and quantify the dynamic effects of money on output and inflation maximum likelihood estimates of the modelos parameters take both these considerations into account but still suggest that money plays a minimal role in the monetary business cycle

eurosystem monetary targeting lessons from u s data abstract using a small empirical model of inflation output and money estimated on u s data we compare the relative performance of monetary targeting and inflation targeting the results show monetary targeting to be quite inefficient yielding both higher inflation and output variability this is true even with a nonstochastic money demand formulation our results are also robust to using a p model of inflation therefore in these popular frameworks there is no support for the prominent role given to money growth in the eurosystem s monetary policy strategy

the future of monetary aggregates in monetary policy analysis this paper considers the role of monetary aggregates in modern macroeconomic models of the new keynesian type the focus is on possible developments of these models that are suggested by the monetarist literature and that in addition seem justified empirically both the relation between money and inflation and between money and aggregate demand are considered regarding the first relation it is argued that both the mean and the dynamics of inflation in present day models are governed by money growth this relationship arises from a conventional aggregate demand channel claims that an emphasis on the link between monetary aggregates and inflation requires a direct channel connecting money and inflation are wide of the mark the relevance of money for aggregate demand in turn lies not via real balance effects or any other justification for money in the is equation but on money s ability to serve as a proxy for the various substitution effects of monetary policy that exist when many asset prices matter for aggregate demand this role for monetary aggregates which is supported by empirical evidence enhances the value of money to monetary policy

a duration model of irreversible oil investment theory and empirical evidence the aim of this paper is to analyse the implications of the theory of irreversible investment under uncertainty for investment in oil fields on the united kingdom continental shelf ukcs we consider the problem of an operator who owns a licence to develop and extract oil from a field of known capacity an intertemporal optimization model in discrete time is developed to derive decision rules for the timing of the irreversible development investment and for the optimal rate of extraction model simulation is then used to describe the properties of the numerical solutions the predictions of the theory on the determinants of the irreversible investment decision are then examined using statistical duration analysis data on the length of the time period between discovery and development are available for individual fields on the ukcs we measure the duration of the irreversible investment gestation lag for each field and test the model by assessing the significance of the theoretical variables in explaining the significance of such a lag both our theoretical model and our empirical results suggest the importance of a nonlinear interaction of the level of oil prices and the volatility of oil prices in determining the development lag the simulation of our theoretical model shows a nonlinear impact of oil price volatility on the trigger level of oil prices our empirical results suggest that the effect of price volatility is a function of the expected price level with increased price volatility having a positive impact on the duration of investment appraisal when expected prices are low and a negative impact when they are high

estimating the evolution of money s role in the u s monetary business cycle we assess money s role in the post wwii u s business cycle by employing both fixed coefficient and rolling window bayesian estimations of a structural model of the business cycle with money our empirical evidence favors a specification with drifting parameters for money consumption nonseparability and the federal reserve s reaction to nominal money growth the role of money is estimated to have been important during the 1970s and declined afterward the omission of money produces severely distorted impulse response functions relative to the model with money money is found to be important in replicating the u s output volatility during the great inflation

non cooperative public good provision and productivity differentials we explore the generality of a rotten spouse theorem in konrad and lommerud 1995 while the result holds for an arbitrary number of agents it fails to hold for general technologies some of the implications for models of co emissions are discussed

why money growth determines inflation in the long run answering the woodford critique woodford 2007 argues that it is not appropriate to regard inflation in the steady state of new keynesian models as determined by steady state money growth woodford instead argues that the intercept term in the monetary authority s interest rate policy rule determines steady state inflation in this paper i offer an alternative interpretation of steady state behavior according to which it is appropriate to regard steady state inflation as determined by steady state money growth the argument relies on traditional interpretations of the central bank s power in the long run and appeals to model properties that are common to textbook and new keynesian analysis according to this argument the only way the central bank can control interest rates in the long run is via affecting inflation and its only means available for determining inflation is by determining the money growth rate

discussion of putting m back in monetary policy by eric leeper and jennifer roush the european central bank assigns a prominent role for money and monetary analysis in its monetary policy strategy it will therefore not come as a surprise that i am very sympathetic to the general theme of eric leeper and jennifer roush s paper indeed let us put m back in monetary policy in this paper leeper and roush 2003 this issue of jmcb show quite convincingly that explicitly allowing for a short term response of the policy controlled interest rate to money m2 rather than to contemporaneous output and prices as in the taylor rule helps identify the effects of exogenous monetary policy shocks in a monthly var it reduces the price and liquidity puzzle which is so often incurred in this type of exercise it increases the size and the persistence of the output and price effects of a monetary policy shock it improves the estimation of the short run money market supply and demand schedules and importantly these findings appear to be robust across various sub samples possibly with the exception of the most recent sub sample the bottom line is therefore let us put m back in the monetary policy reaction while i will not disagree with this conclusion and i will provide some additional evidence for the euro area in section 3 of this discussion it is worth asking why the estimated effects of policy shocks with a contemporaneous reaction to money are more plausible than those estimated in vars without such a role for money first is the price puzzle really a puzzle there is no full consensus about this in particular one can construct models in which contractionary monetary policy shocks have an initial positive effect on prices due to an interest rate cost channel e g christiano

money and output new evidence based on wavelet coherence abstract we reassess the relationship between money and output using quarterly data from the us economy we use several tools based on wavelets the wavelet power transform and the wavelet coherence with which we analyze this relationship in both time and frequency we find evidence of a weaker relationship within the great moderation as well as a stronger relationship during the great recession

structural vector autoregressions with smooth transition in variances abstract in structural vector autoregressive analysis identifying the shocks of interest via heteroskedasticity has become a standard tool unfortunately the approaches currently used for modeling heteroskedasticity all have drawbacks for instance assuming known dates for variance changes is often unrealistic while more flexible models based on garch or markov switching residuals are difficult to handle from a statistical and computational point of view therefore we propose a model based on a smooth change in variance that is flexible as well as relatively easy to estimate and illustrate its use by analysis of the interaction between monetary policy and the stock market based on a five dimensional system of u s variables for the benchmark setup it is found that previously used conventional identification schemes in this context are rejected by the data if heteroskedasticity is allowed for we also illustrate the implications of using different transition variables and varying the sample period

does money matter for the identification of monetary policy shocks a dsge perspective this paper investigates how the identification assumptions of monetary policy shocks modify the inference in a standard dsge model considering svar models in which either the interest rate is predetermined for money or money and the interest rate are simultaneously determined two dsge models are estimated by minimum distance estimation the estimation results reveal that real balance effects are necessary to replicate the high persistence implied by the simultaneity assumption in addition the estimated monetary policy rule is sensitive to the identification scheme this suggests that the way money is introduced in the identification scheme is not neutral for the estimation of dsge models c 2010 elsevier b v all rights reserved

what is wrong with taylor rules using judgment in monetary policy through targeting rules it is argued that inflation targeting is best understood as a commitment to a targeting rule rather than an instrument rule e ither ageneral targeting rule explicit objectives for monetary policy or a specific targeting rule a criterion for the forecasts of the target variables to be fulfilled essentially the equality of the marginal rates of transformation and substitution between the target variables targeting rules allow the use of judgment and extramodel information are more robust and easier to verify than optimal instrument rules and they can nevertheless bring the economy close to the socially optimal equilibrium

money in an estimated business cycle model of the euro area this article examines the role of money in a small scale dynamic general equilibrium model of the euro zone estimated by maximum likelihood the model allows for both intertemporal and intratemporal non separability in preferences we find first that real balances do not affect the marginal utility of consumption second money demand shocks mainly help to forecast real balances while real shocks explain the bulk of price output and interest rates fluctuations third the calculation of the natural rate of interest reveals that the evolution of the interest rate is mostly accounted for by the real sources of fluctuations

why inflation rose and fell policy makers beliefs and u s postwar stabilization policy this paper provides an explanation for the run up of u s inflation in the 1960s and 1970s and the sharp disinflation in the early 1980s which standard macroeconomic models have difficulties in addressing i present a model in which rational policymakers learn about the behavior of the economy in real time and set stabilization policy optimally conditional on their current beliefs the steady state associated with the self confirming equilibrium of the model is characterized by low inflation however prolonged episodes of high inflation ending with rapid disinflations can occur when policymakers underestimate both the natural rate of unemployment and the persistence of inflation in the phillips curve i estimate the model using likelihood methods the estimation results show that the model accounts remarkably well for the evolution of policymakers beliefs stabilization policy and the postwar behavior of inflation and unemployment in the united states

the impact of commodity price shocks in the presence of a trading relationship a gvar analysis of the nafta this paper investigates the commodity price shocks and monetary shocks in the region covered by the north american free trade agreement nafta using a global vector autoregression gvar approach our focus is on commodity price shocks which impact both directly through the aggregate price level as well as through monetary policy related aggregates such as short term interest rates we first contrast the response of the real economy to commodity price shocks in two periods 1983q2 2015q2 and 1994q1 2015q2 where the beginning of the second sample coincides with a statistically identified structural break as well as the introduction of nafta the results indicate that the commodity price shocks such as for oil and metal have a bigger impact on the real economy after nafta came into force withmetal prices having a larger quantitative impact on output in comparison to oil prices next we investigatewhether these changes have different implications for the impact of domestic monetary shocks in the three countries we find that while the post nafta period is characterized by a stronger domestic monetary policy response to commodity price shocks the response to monetary shocks per se varies in the two time periods in particular u s monetary policy as reflected in shocks to short term interest rates has a weaker influence in the post nafta period overall the influence of global commodity price shocks in the region relative to domestic monetary shocks is greater in the post nafta period

terms of trade fluctuations and economic growth in developing economies abstract the effect of terms of trade fluctuations on capital accumulation is investigated in a simple open economy stochastic growth model imported inputs make domestic capital more productive but export prices are uncertain the model s output process has a random walk component so even transient price shocks have permanent effects on output levels the size of the random walk component depends on the country s trade share the supply response of exports and other structural parameters also more variable export prices generally reduce expected domestic investment these results are consistent with the estimated variance ratios and impulse response functions for a number of ldcs

symposium on global climate change since the industrial revolution increased use of fossil fuels has been strongly linked with economic growth in recent years many scientists have argued that carbon dioxide emissions from fossil fuel combustion are likely to make the earth s climate warmer and some have argued that the consequences could be disastrous global climate change and policies to slow it or adapt to it may be among the primary forces shaping the world s economy throughout the next century and beyond nonetheless popular treatments of this issue commonly ignore economics and assume that if society learns that any warming is likely as a result of human activity we should do whatever is necessary to stop it this seems to reflect the widespread view that environmental issues involve rights and wrongs not costs and benefits and that environmental policy should eliminate contamination not replace missing markets 1 on this view human activity that may alter the earth s climate risks fouling our nest on a massive scale it is simply wrong and must be stopped regardless of cost economics has also been neglected in the pronouncements of the intergovernmental panel on climate change ipcc which was established in 1988 primarily to inform international negotiations on climate change policy 2 the ipcc has produced useful assessments of relevant scientific information but