international technology oriented agreements to address climate change much discussion has surrounded possible alternatives for international agreements on climate change particularly post 2012 among these alternatives technology oriented agreements toas are perhaps the least well defined we explore what toas may consist of why they might be sensible which toas already exist in international energy and environmental governance and whether they could make a valuable contribution to addressing climate change we find that toas aimed at knowledge sharing and coordination research development or demonstration could increase the overall efficiency and effectiveness of international climate cooperation but are likely to have limited environmental effectiveness on their own technology transfer agreements are likely to have similar properties unless the level of resources expended is large in which case they could be environmentally significant technology specific mandates or incentives could be environmentally effective within the applicable sector but are more likely to make a cost effective contribution when viewed as a complement to rather than a substitute for flexible emissions based policies these results indicate that toas could potentially provide a valuable contribution to the global response to climate change the success of specific toas will depend on their design implementation and the role they are expected to play relative to other components of the policy portfolio

one switch utility functions and a measure of risk consider the relative attractiveness to a decision maker of two financial gambles as the wealth of that individual varies it may seem reasonable that either one alternative should be preferred for all wealth levels or that there exists a unique critical wealth level at which the decision maker switches from preferring one alternative to the other decreasing risk aversion is not sufficient for this property to hold we identify the small class of utility functions for which it does we show how the property leads naturally to a measure of risk the results of this paper apply equally well to discounting functions for cash flows one switch discount functions permit at most one change in preference between cash flows as all payoffs are deferred in time

trading for the future signaling in permit markets abstract permit markets are celebrated as a policy instrument since they allow i firms to equalize marginal costs through trade and ii the regulator to distribute the burden in a politically desirable way these two concerns however may conflict in a dynamic setting anticipating the regulator s future desire to give more permits to firms that appear to need them firms purchase permits to signal their need this raises the price above marginal costs and the market becomes inefficient if the social cost of pollution is high and the government intervenes frequently in the market the distortions are greater than the gains from trade and non tradable permits are better the analysis helps to understand permit markets and how they should be designed

long run equilibrium modeling of emissions allowance allocation systems in electric power markets carbon dioxide allowance trading systems for electricity generators are in place in the european union and in several u s states an important question in the design of such systems is how allowances are to be initially allocated by auction by giving away fixed amounts grandfathering or by allocating based on present or recent output investment or other decisions the latter system can bias investment operations and product pricing decisions and increase costs relative to the other systems a nonlinear complementarity model is proposed for investigating the long run equilibria that would result under alternative systems for power markets characterized by time varying demand and multiple technology types existence of equilibria is shown under mild conditions solutions for simple systems show that allocating allowances to new capacity based on fuel use or generator type can yield large distortions in capacity investment invert the operating order of power plants and inflate consumer costs the distortions can be smaller for tighter co2 restrictions and are somewhat mitigated if there is also a market for electricity capacity or minimum run restrictions on coal plants distortions are also less if allowances are allocated to plants in proportion to sales rather than capacity

climate policy and fiscal constraints do tax interactions outweigh carbon leakage climate policymaking faces twin challenges of carbon leakage and public sector revenue requirements a large literature advocates the use of carbon dioxide co2 pricing and recycling the revenues to lower distorting taxes as a way to minimize costs in this paper we explore the implications of labor tax interactions for the cost effectiveness of border adjustments and other measures to cope with leakage we find that for plausible values of labor supply elasticities the cost savings from revenue recycling are significant from 15 to 25 percent the cost savings from anti leakage measures are generally smaller but also significant particularly for small coalitions or more binding reduction targets tax interactions further enhance the cost savings from border adjustments but make other measures like rebates or exemptions less attractive

benchmarking in the european union emissions trading system abatement incentives abstract this paper investigates abatement incentives for allowance allocation based on output and sector specific benchmarks here called output based allocation or benchmarking special attention is given to updated allocation and we assume that allowances can be traded with other sectors open cap we confirm earlier studies that output based allocation based on ex ante data provide the same abatement incentives as auction or grandfathering and also confirm that output based allocation with updated output and ex ante benchmarks provides as high abatement incentives as auction but constitutes a production subsidy however we also find that benchmarking with updated output and updated benchmarks reduces abatement incentives somewhat but less so than updated grandfathering an allocation rule where the sector cap is prescribed ex ante for instance based on historic emissions and distributed to installations in proportion to their updated production preserves full abatement incentives and avoids some of the costs associated with the determination of benchmarks however this rule also constitutes a production subsidy which decreases with industry concentration if a sector is split into smaller groups each with one benchmark per sub sector benchmarking evolves toward grandfathering since benchmarking is conditioned on production this allocation method protects production from leakage i e migrating to areas where firms face no emissions cost this may actually be the most compelling reason for choosing benchmarking

the inflation output variability tradeoff and monetary policy evidence from a garch model this paper empirically investigates the taylor curve volatility tradeoff in light of the stochastic behavior of the conditional variances of output and inflation stressing structural instability between periods before and after the 1979 1982 monetary policy regime change i implement a bivariate generalized autoregressive conditional heteroskedasticity model to capture the output inflation variability tradeoff and to explore the plausible impact of a change in the federal funds rate on the two conditional volatilities i further evaluate the impacts of anticipated and unanticipated policy actions measured by two alternative policy reaction functions one from a vector autoregression based reduced form equation and another based on the taylor rule in addition to showing a volatility tradeoff relationship the empirical model reveals different magnitudes of policy effects on output and inflation volatility across the two sample periods

output based allocations and revenue recycling implications for the new zealand emissions trading scheme abstract the new zealand emissions trading scheme nz ets is more comprehensive in its coverage of emissions than schemes introduced or proposed to date in any other country in that it includes agricultural greenhouse gases which account for half of new zealand s total emissions but motivated by concerns for the international competitiveness of emissions intensive trade exposed industrial and agricultural activities current legislation provides for substantial ongoing free allocations to such activities linked to their output here we use a computable general equilibrium model to analyse the impacts of output based allocation given the possibility of recycling net revenues to reduce prior distorting taxes unlike previous modelling studies of alternative nz ets designs we allow for a more realistic modelling both of capital and labour supply we find that as suggested by theoretical results interactions between the ets and existing taxes are important given any level of output based allocation the negative macroeconomic impacts can be reduced by recycling net revenues as efficiently as possible less obviously we find that there may be an optimal non zero level of output based allocation this optimal level increases as the carbon price and or factor supply elasticities increase but decreases if revenues are recycled with greater efficiency

solution of macromodels with hansen sargent robust policies some extensions abstract we summarize some methods useful in formulating and solving hansen sargent robust control problems and suggest extensions to discretion and simple rules matlab octave and gauss software is provided we illustrate these extensions with applications to the term structure of interest rates the time inconsistency of optimal monetary policy the effects of expectations on the variances of inflation and output and on whether central banks should make their forecasts public

an assessment of a proposed ets in australia by using the monash green model abstract using the monash green model and a database containing detailed energy sectors this paper evaluates the effects of a proposed emissions trading scheme on the australian economy and the emissions levels the simulation results indicate that the price of carbon permits has to increase from a 4 1 per tonne in 2015 through a 13 1 per tonne in 2020 to a 41 3 per tonne in 2030 to achieve a target of 28 below the 2005 level in 2030 the main buyers of permits would be the agricultural sector black coal electricity sector and brown coal electricity sector compared to the business as usual scenario australia s gdp is projected to be 0 85 lower in 2020 and 1 6 lower in 2030 household welfare measured in terms of equivalent variations will increase due to compensations provided by the government the results also lend strong support towards the transition to renewable energy the stylised model was adapted to inform the results of the full model

monetary policy when interest rates are bounded at zero this paper assesses the importance of the zero lower bound on nominal interest rates for the interest rate channel of monetary policy we simulate several interest rate setting policy rules with ei

the inflation and output variability tradeoff evidence from a garch model abstract this paper empirically investigates the possibility of a tradeoff between the variability of inflation and output gap over the period 1960 1997 in light of a bivariate garch model there is strong evidence of temporal instability in the garch process and the variability tradeoff is more apparent for the post october 1979 subperiod the slope of the tradeoff nevertheless appears to be considerably flat

differentiated products increasing returns to scale and heterogeneous firms in a cge model of the australian coal sector we use a computable general equilibrium cge model to re evaluate the effects of the introduction of a tax on co2 emissions in australia after incorporating a number of important aspects of australian coal production while other studies for example commonwealth of australia 2008a clarke and waschik 2012 model coal as a single aggregate sector we disaggregate coal into black and brown coals brown coal is non traded while most black coal is exported and brown coal has a higher emission intensity than black coal coal is a differentiated product whose production is characterized by the existence of very large fixed costs and considerable differences in the ratio of capital expenditures to capacity between coal mines so we use balistreri and rutherford 2012 and melitz 2003 to incorporate increasing returns to scale production technology and heterogeneous productivities between monopolistically competitive coal firms we find that while the aggregate effects of achieving a given level of abatement are largely unaffected by disaggregation of coal the effects within the black and brown coal sectors are very different the introduction of increasing returns to scale and heterogeneous firms does have important effects on the aggregate welfare costs of achieving a given level of abatement when monopolistically competitive coal producers face more inelastic demand welfare costs rise firm exit falls and the carbon price needed to achieve a given level of abatement falls

how important is precommitment for monetary policy we quantify the welfare differential between precommitment and discretionary monetary policy in three estimated models of the u s economy by calculating the permanent deviation of inflation from target that in welfare terms is equivalent to moving from discretion to precommitment using a range of reasonable central bank preference parameters this inflation equivalent ranges from 0 05 to 3 6 percentage points with a mid point of either 0 15 or 1 1 5 percentage points depending on the model in addition to the degree of forward looking behavior we show that the existence of transmission lags and or information lags is crucial for determining the welfare gain from precommitment

time inconsistency and the exchange rate channel of monetary policy this paper analyses time inconsistency problems related to the exchange rate channel of monetary policy within a simple open economy macroeconomic model where the exchange rate is the only forward looking variable we show that a difference emerges between optimal policy under discretion and under commitment moreover the nature of the time inconsistency problem resembles that resulting from standard new keynesian models when cost push shocks occur the exchange rate channel gives rise to excessive output stabilisation and insufficient inertia in monetary policy under a discretionary policy

estimating new keynesian phillips curves a full information maximum likelihood approach abstract the new keynesian phillips curve has recently become an important ingredient in monetary policy models however using limited information methods the empirical support for the new keynesian phillips curve appear to be mixed this paper argues by means of monte carlo simulations with a simple new keynesian sticky price model that single equations methods e g gmm are likely to produce imprecise and biased estimates then it is argued that estimating the model with full information maximum likelihood fiml is a useful way of obtaining better estimates finally a version of the model used in the monte carlo simulations is estimated on u s data with fiml and although the pure forward looking new keynesian phillips curve is rejected a version with both forward and backward looking components provides a reasonable approximation of u s inflation dynamics

inflation output variance trade offs and optimal monetary policy the author estimates the inflation output gap variance trade off faced by monetary policymakers in the united states for policymakers who care about deviations of inflation around target and output around potential the estimated trade off represents the optimal policy frontier given the structure of the economy policymakers can do no better than to attain weighted variances of inflation and output that lie on the frontier the author finds that the variance trade off becomes quite severe when the standard deviation of inflation or output drops much below 2 percent this suggests that approximately balanced responses to policy goals are consistent with reasonable preferences over inflation and output variability copyright 1997 by ohio state university press

econometric policy evaluation and inverse control the traditional approach to monetary policy evaluation entails a first step in which structural parameters are estimated and a second in which the performance of alternative policy rules is studied this paper combines the two steps of the traditional approach into one by estimating a structural model subject to the restriction that the central bank chooses the policy rule that minimizes expected loss the structure is a forward looking new keynesian model in which equilibrium values of output and inflation depend on expectations of future values of those variables analysis of u s data between 1965 and 2001 support the hypotheses that the sample contains two policy regimes that the fed placed far greater weight on stabilizing inflation after 1980 and that improvements in policy were available in both regimes the unified approach also sharpens estimates of structural parameters

emissions trading with updated allocation effects on entry exit and distribution allocation of emissions allowances may have significant distributional and efficiency effects it is well known that cost efficiency may be achieved if allowances are auctioned or distributed in a lump sum manner e g based on emissions levels before the start of the system grandfathering bohringer and lange eur econ rev 49 2041 2055 2005 show that a cost effective outcome can also be achieved if the base year for allocation is continually updated updating given that banking and borrowing are prohibited in this paper we examine whether updating alters the entry and exit conditions for firms compared to grandfathering and how it affects profits for new and existing firms we find that the two schemes function surprisingly similar first the incentives to entry and exit are identical second the total value of free quotas to existing firms based on emissions before the system starts is also identical without any auctioning with updating initial claims for free allowances have a shorter lifetime compared to grandfathering but quota prices are higher as firms anticipate the effect of current emissions on future claims to free allowances the two effects exactly cancel each other out if there is some combination of auction and free allocation the total value of free quotas will always be highest under grandfathering if the auction rate is the same entry and exit incentives are still equal

exploring the impacts of regional unbalanced carbon tax on co_2 emissions and industrial competitiveness in liaoning province of china carbon tax is regarded as a useful policy instrument to achieve the environmental target efficiently however the effect of regional unbalanced carbon tax is still unknown in this study an improved two region computable general equilibrium cge model is developed to fill this research gap with liaoning province and the rest of china roc as the study area business as usual bau and nine carbon tax scenarios are designed results show that in 2030 the highest carbon tax of 221 usd ton co 2 in taxc4p8 scenario in liaoning province will lead to carbon reduction of 44 92 with the cost of 5 54 gross domestic product gdp loss price effect and scale effect are the two mechanisms that affect the changes in gdp industrial output and co 2 emissions industrial structure energy consumption and carbon intensity of liaoning are overwhelmingly affected by the price effect most less energy intensive industries belong to the winner industries due to the higher influence of domestic market by contrast loser industries including most of the energy intensive industries are mainly affected by the changes of provincial and international markets roc region is mainly affected by the price effect suggestions about preferential developmental industries are offered to balance the environmental and economic concerns

a contextual uncertainty condition for behavior under risk suppose that your choice between uncertain financial prospects is made more difficult by two independent contextual uncertainties concerning the size of your existing wealth one contextual uncertainty has a greater spread than the other if you could resolve one of these contextual uncertainties before making your choice would you rather it be the larger or the smaller in this paper we explore the intuitive notion that it ought to be more advantageous to resolve larger rather than smaller contextual uncertainties the utility function for wealth uw aw be cwa b c 0 is the only utility function that satisfies this condition and that is also increasing and risk averse at all wealth levels

asymmetric industrial energy prices and international trade this paper measures the response of bilateral trade flows to differences in industrial energy prices across countries using a panel for the period 1996 2011 including 42 countries 62 sectors and covering 60 of global merchandise trade we estimate the short run effects of sector level energy price asymmetry on trade we find that changes in relative energy prices have a statistically significant but very small impact on imports on average a 10 increase in the energy price difference between two country sectors increases imports by 0 2 the impact is larger for energy intensive sectors even in these sectors however the magnitude of the effect is such that changes in energy price differences across time explain less than 0 01 of the variation in trade flows simulations based on our model predict that a 40 65 tco2 price of carbon in the eu ets would increase europe s imports from the rest of the world by less than 0 05 and decrease exports by 0 2

the effect of allowance allocations on cap and trade system performance abstractan implication of the coase theorem is that under certain conditions the market equilibrium in a cap and trade system will be cost effective and independent of the initial allocation of tradable rights that is the overall cost of achieving a given aggregate emission reduction will be minimized and the final allocation of permits will be independent of the initial allocation we call this the independence property this property is important because it means that the government can establish the overall pollution reduction goal for a cap and trade system by setting the cap and leaving it up to the legislature to construct a constituency in support of the program by allocating the allowances to various interests without affecting either the environmental performance of the system or its aggregate social costs we examine the conditions under which the independence property is likely to hold both in theory and in practice

a standard measure of risk and risk value models in this paper we propose a standard measure of risk that is based on the converted expected utility of normalized lotteries with zero expected values this measure of risk has many desirable properties that characterize the notion of risk it is very general and includes many previously proposed measures of risk as special cases moreover our standard measure of risk provides a preference based and unified method for risk studies since the standard measure of risk is compatible with the measure of expected utility it can be used explicitly or implicitly in an expected utility model under a condition called risk independence a decision could be made by explicitly trading off between risk and value which offers an alternative representation of the expected utility model named the standard risk value model finally we discuss some other applications of the standard measure of risk and extensions of our risk value tradeoff framework for descriptive decision making

two moment decision models and expected utility maximization two moment decision models are consistent with expected utility maximization only if the choice set or the agent s preferences are restricted this paper identifies a restriction which is sufficient to ensure this consistency and confirms that it holds in many economic models the implications for economic analysis are then derived two different approaches to representing an agent s preferences over strategies yielding random payoffs are in wide use under the mean standard deviation ms approach the agent is assumed to rank the alternatives according to the value of some function defined over the first two moments of the random payoff while the expected utility eu criterion assumes that the expected value of some utility function defined over payoffs is used instead the fact that there are these two competing approaches has generated a considerable literature some authors are concerned with the advantages and disadvantages of each while others deal with conditions under which the potentially different approaches would yield the same results or at least approximately so space does not

robust monetary policy with competing reference models abstract the existing literature on robust monetary policy rules has largely focused on the case in which the policymaker has a single reference model while the true economy lies within a specified neighborhood of the reference model in this paper we show that such rules may perform very poorly in the more general case in which non nested models represent competing perspectives about controversial issues such as expectations formation and inflation persistence using bayesian and minimax strategies we then consider whether any simple rule can provide robust performance across such divergent representations of the economy we find that a robust outcome is attainable only in cases where the objective function places substantial weight on stabilizing both output and inflation in contrast we are unable to find a robust policy rule when the sole policy objective is to stabilize inflation we analyze these results using a new diagnostic approach namely by quantifying the fault tolerance of each model economy with respect to deviations from optimal policy

designing climate mitigation policy this us paper provides an exhaustive review of critical issues in the design of climate mitigation policy by pulling together key findings and controversies from diverse literatures on mitigation costs damage valuation policy instrument choice technological innovation and international climate policy the authors begin with the broadest issue of how high assessments suggest the near and medium term price on greenhouse gases would need to be both under cost effective stabilization of global climate and under net benefit maximization or pigouvian emissions pricing the remainder of the paper focuses on the appropriate scope of regulation issues in policy instrument choice complementary technology policy and international policy architectures

house prices borrowing constraints and monetary policy in the business cycle i develop a general equilibrium model with sticky prices credit constraints nominal loans and asset prices changes in asset prices modify agents borrowing capacity through collateral value changes in nominal prices affect real repayments through debt deflation monetary policy shocks move asset and nominal prices in the same direction and are amplified and propagated over time the financial accelerator is not constant across shocks nominal debt stabilises supply shocks making the economy less volatile when the central bank controls the interest rate i discuss the role of equity debt indexation and household and firm leverage in the propagation mechanism finally i find that monetary policy should not target asset prices as a means of reducing output and inflation volatility

revenue raising vs other approaches to environmental protection the critical significance of pre existing tax distortions using analytical and numerical general equilibrium models we show that preexisting factor taxes produce a tax interaction effect that increases the costs of pollution taxes and quotas under policies that raise revenue and recycle it through cuts in marginal factor tax rates this effect is partially offset by a revenue recycling effect grandfathered pollution quotas such as those used under the 1990 clean air act amendments to regulate electric utilities so2 emissions do not benefit from this offset preexisting taxes raise this regulation s cost by over 70 more than half of this additional cost could be avoided by auctioning quotas and exploiting the revenue recycling effect

robust technology policy against emission leakage the case of upstream subsidies asymmetric regulation of a global pollutant between countries can alter the competitiveness of industries and lead to emissions leakage which hampers countries welfare in order to limit leakage governments consider supporting domestic trade exposed firms by subsidizing their investments in abatement technology the suppliers of such technologies tend to be less than perfectly competitive particularly when both emissions regulations and advanced technologies are new in this context of twin market failures we consider the relative effects and desirability of subsidies for abatement technology we find a more robust recommendation for upstream subsidies than for downstream subsidies downstream subsidies tend to increase global abatement technology prices reduce pollution abatement abroad and increase emission leakage on the contrary upstream subsidies reduce abatement technology prices and hence also emissions leakage

inflation persistence and robust monetary policy design this paper examines the performance of optimised interest rate rules when there is uncertainty about a key determinant of the monetary transmission mechanism namely the degree of persistence characterising the inflation process the paper focuses on the euro area and utilises two variants of an estimated small scale macroeconomic model featuring distinct types of staggered contracts specifications which induce quite different degrees of inflation persistence the paper shows that a cautious monetary policy maker is well advised to design and implement interest rate policies under the assumption that inflation persistence is high when there is considerable uncertainty about the prevailing degree of inflation persistence such policies are characterised by a relatively aggressive response to inflation developments and exhibit a substantial degree of inertia

returns policy new model introduction and consumer welfare abstract this paper investigates how economic outcomes differ for new model introduction between two extreme contracts outright sales contract and returns policy contract with full credit under the outright sales contract we show that the retailer s incentive to introduce a new model can lead to a reduction of consumer welfare when the retailer is moderately risk averse the primary conclusion from this study is that the returns policy contract resolves this conflict between firms and consumers and that the supply chain introduces the new model only when consumer surplus from the new model is higher than that from the old model

output based allocations in pollution markets with uncertainty and self selection we study pollution permit markets in which a fraction of permits are allocated to firms based on their output output based allocations which are receiving increasing attention in the design of carbon markets around the world e g europe california new zealand are shown to be optimal under demand and supply volatility despite the output distortions they may create in a market that covers multiple sectors the optimal design combines auctioned permits with output based allocations that are specific to each sector and increasing in its volatility when firms are better informed about the latter or must self select the regulator resort to some free i e lump sum allocations to sort firms out numerical exercises illustrate the policy relevance of our results the gains from considering output based allocations can be substantial

the welfare implications of climate change policy abstract the response to three different climate change policies is measured within a general equilibrium model of world output technological change greenhouse gas emissions and climate driven changes in productivity the proposed policies including an approximation to the kyoto protocol are shown to differ greatly in how they mitigate climate change support economic growth and allocate rents across generations benefits of alternative policies relative to the status quo do not necessarily accrue to the generations that bear the costs the results also show that the chosen rent distribution rule has a profound effect on policy evaluation in particular policies which allocate rents on a per capita basis are shown to be systematically welfare preferred to situations where emissions rights are grandfathered to emitting firms this implies that both the optimal level of emissions and the welfare cost of reaching a given target of emissions or atmospheric concentration would be lower under a per capita allocation of emissions permits or carbon tax revenues

output volatility in australia a number of papers have documented a significant decline in real gdp volatility in several major oecd economies some authors have presented evidence to suggest that this is the outcome of a one off structural break from a high to low volatility state whilst others have estimated regime switching models that indicate low volatility regime states have dominated in recent years this article provides further evidence on the general properties of output volatility for australia including evidence of a significant moderation in output volatility for the country that occurred in the early 1980s estimates of various garch models of real gdp growth are also provided to further examine shorter term volatility features of the australian economy that are associated with its business cycle a regime shift dummy is maintained in all models of the conditional variance in order to account for the regime shift in volatility and evidence is found of significant business cycle effects including leverage effects and asy

a small estimated euro area model with rational expectations and nominal rigidities abstract we estimate a small model of the euro area to be used for evaluating alternative monetary policy strategies starting with the relationship between output and inflation we compare the fit of the nominal wage contracting model due to taylor j political econom 88 1980 1 and the relative real wage contracting model proposed by buiter and jewitt the manchester school 49 1981 211 reprinted in buiter ed macroeconomic theory and stabilization policy manchester university press manchester 1989 and estimated with u s data by fuhrer and moore quart j econom 110 1995 127 while fuhrer and moore reject nominal contracts in favor of relative contracts which induce more inflation persistence we find that both specifications fit euro area data reasonably well when considering france germany and italy separately however we find that nominal contracts fit german data better while the relative contracting model does well with respect to formerly high inflation countries such as france and italy we close the model by estimating an aggregate demand relationship and investigate the implications of nominal versus relative contracts for the inflation output variability tradeoff when monetary policy follows taylor s rule

evaluating point and density forecasts of dsge models this paper investigates the accuracy of point and density forecasts of four dsge models for inflation output growth and the federal funds rate model parameters are estimated and forecasts are derived successively from historical u s data vintages synchronized with the fed s greenbook projections point forecasts of some models are of similar accuracy as the forecasts of nonstructural large dataset methods despite their common underlying new keynesian modeling philosophy forecasts of different dsge models turn out to be quite distinct weighted forecasts are more precise than forecasts from individual models the accuracy of a simple average of dsge model forecasts is comparable to greenbook projections for medium term horizons comparing density forecasts of dsge models with the actual distribution of observations shows that the models overestimate uncertainty around point forecasts

risk value models restrictions and applications abstract sarin and weber european journal of operational research 70 1993 135 and others have argued for the expression of preferences under risk by the use of risk value models which have the intuitively appealing property that absence of certainty enters the decision maker s preference function only through a well defined risk argument the present paper proposes axioms which should be satisfied by any such model and explores the restrictions that the axioms place on the preference function implications for absolute and relative risk aversion are considered and the usefulness of the approach is demonstrated with applications to portfolio theory and the theory of the firm

pollution taxes and revenue recycling abstract discussions of environmental policy and the tax system have emphasized the value of pollution tax revenues which can be used to reduce other tax distortions in the economy however by raising private marginal production costs environmental taxes also tend to reduce gdp and exacerbate the welfare costs of conventional taxes for environmental taxes in consumption goods industries the net welfare change from these two effects is negative unless this good is a relatively weak substitute for leisure an estimate for the optimal pollution tax with full revenue recycling is 63 to 78 of marginal environmental damages

consignment auctions of free emissions allowances abstract while the initial distribution of emissions allowances is usually thought to be independent of the emissions outcome free allocation can affect the efficiency and fairness of allowance trading inefficiency may result from thin allowance markets poor price discovery and regulatory or organizational complexities that hinder the recognition of opportunity costs concerns about fairness may result from intransparency in the process of transferring substantial allowance value we explore the role of consignment auctions in mitigating these concerns these revenue neutral auctions return the financial value of allowances to their original holders while revealing prices and directing allowances to their highest valued use they also can be used to support a minimum price when allowances are freely distributed which may facilitate program linkage consignment auctions have minimal administrative costs and do not necessarily involve government experience indicates that they can play an important role especially in new markets

third degree stochastic dominance here f x and g x are less than cumulative probability distributionis where x is a continuous or discrete random variable representing the outcome of a prospect the closed interval a b is the sample space of both prospects the integral shown in rule 2 and those shown throughout the paper are stieltjes integrals recall that the stieltjes integral fb f x dg x exists if one of the functions f and g is continuous and the other has finite variation in a b let d1 d2 and d3 be three sets of utility functions x d1 is the set containing all utility functions with 4 x and 1 x continuous and 41 x 0 for all xe a b d2 is the set with x 1 x 2 x continuous and q j x 0 02 x o for all xc a b d3 is the set with x 1 x 2 x 3 x continuous and 1 x 04 2 x o o for all xc a b here 1 x denotes the ith derivative of x hadar and russell proved that rule 1 is valid for all cd1 and rutle 2 is valid for all ed2 the authors point out that the set of probability distributions that can be ordered by means of second degree stochastic dominance is in general larger than that which can be ordered by means of first degree stochastic dominance note that in rule 2 they assume that x is not only an increasing function of x but also exhibits weak global risk aversion a condition guaranteed by requiring the second derivative of x to be nonpositive in this paper a condition which will be called third degree stochastic dominance is considered it is based on the following assumption about the form of the utility function x from a normative point of view one expects the risk premium associated with an uncertain prospect to become smaller the greater is the individual s wealth the plausibility and implications of this assumption h ave been explored by john pratt as well as others the risk premium of an uncertain prospect is that amount by which the certainty equivalent of the prospect differs from its expected value in mathematical terms given the prospect f x with expected value a the corresponding risk premium t is obtained by solving the following equation rb

switching to carbon free production processes implications for carbon leakage and border carbon adjustment climate policy under partial global compliance raises concerns regarding carbon leakage while border carbon adjustment bca measures are a potential remedy they have also been criticised on various grounds this paper therefore investigates whether a policy fostering the switch to carbon free technologies can substitute for bcas a reason for the effectiveness of a targeted technology policy is that major leakage prone sectors such as iron and steel have two main sources of carbon emissions combustion of fossil fuels and industrial processes while combustion emissions can be reduced relatively easy by increasing energy efficiency reducing process emissions requires a switch to low carbon production processes e g in steel production by deploying electrolysis based on large scale solar electricity we show by means of a multi regional computable general equilibrium analysis that such a switch in steel production technology can eliminate a significant fraction of carbon leakage and also increase sectoral output and welfare since the necessary technologies are not available at large scale yet however are likely to be by 2020 a transitional bca scheme may be a crucial supportive instrument to foster such technology switches yet in the long run bca should be phased out to preserve the incentive for carbon free innovation

the double dividend hypothesis in a cge model specific factors and the carbon base abstract we use a computable general equilibrium model to empirically examine the double dividend dd hypothesis using the gtap model data for australia we examine three environmental taxes on the production of energy goods following bento and jacobsen 2007 we examine the role played by specific factors in the production of energy goods our results provide support for the existence of a strong dd in australia when revenue is recycled through reductions in consumption taxes the strong dd is larger when the share of specific factors is higher and is much more pronounced when carbon taxes are charged on the production origin based accounting rather than the usage destination based accounting of carbon these results draw attention to the importance of the definition of the carbon base and have implications for the scale of carbon leakage

labor market distortions and welfare decreasing international emissions trading using a multi region multi sector computable general equilibrium model this paper analyzes the effects of international emissions trading iet with a focus on labor market distortions we construct four separate models with several different labor market specifications 1 a model without labor market distortions 2 a model with taxinteraction effects in the labor market 3 a model with a minimum wage and 4 a model in which a wage curve determines wages we use these models to analyze how the effects of iet change according to model specification the main results from the analysis are as follows first we found that iet generates gains for all participants in the model without labor market distortions second even in the models with labor market distortions importers of emissions permits are highly likely to benefit conversely we show that the possibility of a welfare loss from iet is not as small for exporters of permits in particular in the minimum wage and wage curve models we found that the exporters of emissions permits are likely to be disadvantaged however this also depends on the region in question for example china is likely to suffer under iet whereas russia is likely to benefit finally if we implement policies to alleviate labor market distortion simultaneously with emissions regulation all regions receive benefit from iet

a computable general equilibrium model of international sanctions in iran we detail recent international sanctions against the iranian economy and its government imposed by a subset of developed countries the effects of these sanctions on the iranian economy in general and upon upper and lower income rural and urban iranian households as well as the iranian government are modelled using a computable general equilibrium cge model we supplement the global trade analysis project 8 data set using income and expenditure shares from the urban and rural household income and expenditure survey from the statistical centre of iran sci the model is calibrated to simulate the effects of international sanctions as closely as possible we use endogenous trade taxes to simulate the effects of sanctions on iranian oil and petrochemical exports and iranian imports of petroleum products metal products and motor vehicles our study finds that international sanctions reduced aggregate iranian welfare by 14 15 rural households in iran suffered welfare losses which were almost double those experienced by urban households and the poorest urban and rural households experienced the largest welfare losses in the order of 5 10 but the government of iran sees a decrease in real revenue of 40 50 due to the large negative effect of sanctions on the iranian oil sector

economic and environmental impact analysis of carbon tariffs on chinese exports as an alternative measure for the proposal of border tax adjustments btas advocated by the countries that seek to abate co2 emissions hereafter referred to as abating countries export carbon tax ect voluntarily conducted by the developing countries has been widely discussed in recent years this paper uses the multi regional and multi commodity computable general equilibrium cge model and the gtap8 1 database to investigate the economic and environmental effects of carbon tariffs on chinese exports the following three policy scenarios are considered 1 the abating countries implement cap and trade emission programs without btas 2 the unilaterally abating countries levy import tariffs and export subsidies on non abating countries and 3 the abating countries implement unilateral climate policies combined with ect imposed by china the ect policy of china is evaluated with a carbon price set at 17 us t co2 results illustrate that the ect voluntarily implemented by china is ineffective in reducing its domestic co2 emissions moreover ect merely has a minor impact on global emissions finally the competitiveness of china s energy intensive and trade exposed eite industries suffers substantial losses if export tariffs are imposed however china s gains in terms of welfare and gross domestic product gdp would be slightly improved if an ect policy is implemented compared to the scenario where china is subjected to btas levied by the abating coalition in the light of the tradeoff between tariff revenue for welfare and competiveness losses of the eite industries it is therefore difficult to conclude that carbon tariff on chinese exports is an alternative policy to btas

emissions targets and the real business cycle intensity targets versus caps or taxes for reducing greenhouse gas emissions intensity targets are attracting interest as a flexible mechanism that would better allow for economic growth than emissions caps for the same expected emissions however the economic responses to unexpected productivity shocks differ using a real business cycle model we find that a cap dampens the effects of productivity shocks in the economy on all variables except for the shadow value of the emissions constraint an emissions tax leads to the same expected outcomes as a cap but with greater volatility certainty equivalent intensity targets maintain higher levels of labor capital and output than other policies with lower expected costs and no more volatility than with no policy

comparing policies to combat emissions leakage border carbon adjustments versus rebates we explore conditions determining which anti leakage policies might be more effective complements to domestic greenhouse gas emissions regulation we consider four policies that could be combined with unilateral emissions pricing to counter effects on international competitiveness a border charge on imports a border rebate for exports full border adjustment and domestic output based rebating each option faces different potential legal hurdles in international trade law each also has different economic impacts while all can support competitiveness none is necessarily effective at reducing global emissions nor is it possible to rank order the options effectiveness depends on the relative emissions rates elasticities of substitution and consumption volumes we illustrate these results with simulations for the energy intensive sectors of three different economies the united states canada and europe although most controversial full border adjustment is usually most effective but output based rebating for key manufacturing sectors can achieve many of the gains

a happy half way house medium term inflation targeting in new zealand abstract the 2002 policy targets agreement pta between the government and central bank of new zealand asks the central bank to target inflation over the medium term rather than over an annual target delegating such a medium term objective to the central bank shifts inflation targeting towards a halfway house between inflation targeting and price level targeting we show empirically that this helps time consistent policy approximate the first best commitment policy even when the government asks the central bank to weight output stabilisation differently to society we estimate the new zealand economy with a small open economy dsge model and show that the happiest halfway house is located around a two year averaging horizon at most which leads to mild improvements in monetary policy efficiency

inflation output and uncertainty in the era of inflation targeting a multi economy view on causal linkages abstract this study provides cross country robust evidence on interdependencies among inflation output growth and respective uncertainties for the current era of low inflation policies we attribute the extant empirical disagreement on these relations to the fact that long sampling periods and single economies are typically considered for analysis in this study varx mgarch m models are estimated for 34 developed and emerging economies and the time period of 1990 2010 we study average granger causal effects by aggregating parameter estimates over economies the cross sectional variation of estimates serves as a means to assess the robustness of empirical findings over the entire cross section we find that both inflation and inflation uncertainty significantly reduce output growth economies with low inflation rates are particularly at risk to incur output losses from increasing inflation we also find spillover effects among uncertainty variables where the causal impact if present seems to point from the uncertainty in output to inflation uncertainty

does the fed act gradually a var analysis abstract the tendency for changes in the federal funds rate to be implemented gradually has been considered evidence of an interest rate smoothing objective for the federal reserve this paper investigates whether gradual funds rate movements can be explained by the dynamic structure of the economy and the uncertainty surrounding that structure without recourse to including an ad hoc interest rate smoothing argument in the fed s objective function in the absence of parameter uncertainty the optimal policy involves more aggressive movements in the funds rate than observed parameter uncertainty however limits the responsiveness of the interest rate as a result the optimal policy under parameter uncertainty can account for a considerable portion of the gradualism observed

choice under uncertainty problems solved and unsolved ffifteen years ago the theory of choice under uncertainty could be considered one of the success stories of economic analysis it rested on solid axiomatic foundations it had seen important breakthroughs in the analytics of risk risk aversion and their applications to economic issues and it stood ready to provide the theoretical underpinnings for the newly emerging information revolution in economics 1 today choice under uncertainty is a field in flux the standard theory is being challenged on several grounds from both within and outside economics the nature of these challenges and of our profession s responses to them is the topic of this paper

regional carbon policies in an interconnected power system how expanded coverage could exacerbate emission leakage abstract interconnected regional electricity markets are often subject to asymmetric carbon policies with partial coverage for co2 emissions while the resulting problem of carbon leakage has been well studied its mitigation has received relatively less attention we devise a proactive carbon policy via a bi level modelling approach by considering the impact of an emission cap that limits the cost of damage from a regional power market in particular a welfare maximising policymaker sets the cap when facing profit maximising producers and the damage costs from their emissions at two nodes a partial coverage policy could degrade maximised social welfare and increase total regional co2 emissions with potential for carbon leakage due to a higher nodal price difference a modified carbon policy that considers co2 emissions from both nodes tightens the cap which increases maximised social welfare and decreases total co2 emissions vis a vis the partial coverage policy albeit at the cost of greater scope for carbon leakage as it causes nodal prices to diverge as a compromise an import coverage policy implemented by california that counts only domestic and imported co2 emissions could alleviate carbon leakage at the cost of lower maximised social welfare with higher total emissions vis a vis the modified coverage policy

impacts of climate policy on the competitiveness of canadian industry how big and how to mitigate competitiveness concerns have been at the forefront of climate policy debates in canada particularly as a result of its high energy intensity and significant exposure to international markets this paper uses a dynamic computable general equilibrium model to assess the likely impacts on sectoral competitiveness that would accompany efforts to meet greenhouse gas mitigation targets that have been set by the canadian government additionally it evaluates several design mechanisms that could be used to reduce the negative competiveness impacts associated with adoption of domestic climate policies the analysis suggests that several sectors would likely face significant competiveness challenges under a reference scenario in which permits are given to emitters in lump sum however it finds that competiveness impacts can be minimized by using output based recycling of permits or by using border tax adjustments

downstream regulation of co2 emissions in california s electricity sector this paper examines the implications of alternative forms of cap and trade regulations on the california electricity market specific focus is given to the implementation of a downstream form of regulation known as the first deliverer policy under this policy importers i e first deliverers of electricity into california are responsible for the emissions associated with the power plants from which the power originated even if those plants are physically located outside of california we find that absent strict non economic barriers to changing import patterns such policies are extremely vulnerable to reshuffling of import resources the net impact implies that the first deliverer policies will be only marginally more effective than a conventional source based regulation

using output based allocations to manage volatility and leakage in pollution markets abstract output based allocations obas are typically used in emission trading systems ets with a fixed cap to mitigate leakage in sectors at risk recent work has shown they may also be welfare enhancing in markets subject to supply and demand shocks by introducing some flexibility in the total cap resulting in a carbon price closer to marginal damage we extend previous work to simultaneously include both leakage and volatility we study how oba permits can be implemented under an overall cap that may change with the level of production in contrast with a design that deducts oba permits from the overall permit allocation as is the current practice in the eu ets and california we show that introducing oba permits while keeping the overall cap fixed would only increase price fluctuations and induce severe welfare losses to non oba sectors

effects of unilateral climate policy on terms of trade capital accumulation and welfare in a world economy we present a two good two country overlapping generations model where emissions arise from production and each country has a domestic emission permit system when one country unilaterally reduces her cap on emissions her output available for domestic and foreign consumption diminishes more than in the other country with unchanged consumption expenditure shares for both goods the domestic terms of trade improve while capital stocks decline in the reducing and less strongly in the non reducing country improving terms of trade in the reducing country and falling capital stocks lead in total to welfare losses in both countries however if the country which unilaterally reduces her emission permits is a net creditor to the world economy and the golden rule applies her own welfare loss remains below that of the non reducing country

a risk return model with risk and return measured as deviations from a target return two attribute risk and return models are very popular in the economics and finance literature for analyzing decisions under uncertainty their popularity stems primarily from the intuitive appeal of the dichotomy into risk and return and from the ease with which the concepts can be diagrammed in two dimensions the most commonly used risk return model is the mean variance model in which risk is measured as the variance and return by the mean of the probability distribution over outcomes the mean variance model has a number of shortcomings which are widely known but of particular concern here are the facts that 1 mean variance dominance is neither necessary nor sufficient for second degree stochastic dominance 2 unless the form of the probability distribution is restricted mean variance is consistent with von neumann morgenstern utility theory only if the utility function is quadratic and 3 as peter fishburn has noted

carbon control policies competitiveness and border tax adjustments abstract several propositions have recently been made to use border tax adjustments btas to address the loss of competitiveness induced by unilateral stringent domestic pollution control policies this paper explores in a general equilibrium framework the sectoral and welfare implications of a unilateral domestic ghg control policy combined with a bta scheme using the canadian economy as an illustration we assess the extent to which btas achieve their objectives and analyze the impacts of different methods of recycling the bta proceeds to support domestic industries our simulation results suggest that imposing btas on the imports of non fossil and energy intensive products reduces or removes completely the negative competitiveness impacts that domestic industries suffer from the use of the proceeds of the btas to support domestic energy intensive industries improves their competitiveness and more importantly in some cases overprotects them as it allows them to even increase their output in comparison to the benchmark without emissions control our results also shed light on the existence of heterogeneity in the composition of energy intensive industries as far as the recycling method of the bta proceeds is concerned energy intensive industries that are more oriented toward the domestic market are better off with the recycling of the bta proceeds towards gross output than towards exports alone finally abstracting from the environmental benefits of reduced emissions we find that a bta entails a higher welfare cost to households

climate change policy s interactions with the tax system abstract this paper presents a range of insights from recent literature on how climate change policies and other environmental policies interact with the fiscal system it explores four issues associated with fiscal interactions first it examines how these interactions influence the prospects for a double dividend both an environmental improvement and a reduction in the costs of the tax system second it analyzes how the use of revenues from a carbon tax or from a cap and trade system involving auctioned emissions allowances influences these policies economic costs third it addresses the question whether carbon taxes or cap and trade programs represent more efficient sources of government revenue than other more traditional revenue sources such as income sales or payroll taxes finally it analyzes how fiscal interactions affect the choice between co 2 emissions pricing instruments carbon taxes and cap and trade and other climate policy instruments

the link between macroeconomic performance and variability in the uk abstract this paper examines the link between inflation output growth and their respective variabilities we employ a bivariate garch model which incorporates mean and level effects to investigate in a unified empirical framework all the possible interactions between the four variables we show that not only does variability affect performance but the latter influences the former as well specifically inflation has a positive impact on both variabilities

solving for optimal simple rules in rational expectations models this paper presents algorithms that solve for optimal simple monetary policy rules in rational expectations models with precommitment and discretion the algorithms are applied to the models in fuhrer j money credit banking 29 1997 214 clarida et al j econ lit 37 1999 1661 and rudebusch econ j 112 2002 402 to examine the efficiency properties of operational policy rules we show that optimized taylor type rules preform well in these models but that aside from the fuhrer moore model this result is sensitive to whether the central bank can respond to current period shocks taylor type rules that are operational in the sense that they do not respond to current period information are found to be highly inefficient in the rudebusch model and in the clarida et al 1999 model

output based allocation of emissions permits for mitigating tax and trade interactions the allocation of tradable emissions permits has important efficiency as well as distributional effects when tax and trade distortions are taken into account we compare different rules for allocating carbon allowances within sectors lumpsum grandfathering output based allocation oba auctioning and among sectors historical emissions or value added shares the output subsidies implicit in oba mitigate tax interactions unlike grand fathering oba with sectoral distributions based on value added is similar to revenue recycling with auctioning oba based on historical emissions supports heavier polluters more effectively counter acting carbon leakage but at higher welfare costs less energy intensive sectors are also sensitive to allocation rules

mean risk analysis with enhanced behavioral content abstract we study a mean risk model derived from a behavioral theory of disappointment with multiple reference points one distinguishing feature of the risk measure is that it is based on mutual deviations of outcomes not deviations from a specific target we prove necessary and sufficient conditions for strict first and second order stochastic dominance and show that the model is in addition a convex risk measure the model allows for richer and behaviorally more plausible risk preference patterns than competing models with equal degrees of freedom including expected utility eu mean variance m v mean gini m g and models based on non additive probability weighting such as dual theory dt in asset allocation the model allows a decision maker to abstain from diversifying in a positive expected value risky asset if its performance does not meet a certain threshold and gradually invest beyond this threshold which appears more acceptable than the extreme solutions provided by either eu and m v always diversify or dt and m g always plunge in asset trading the model provides no trade intervals like dt and m g in some but not all situations an illustrative application to portfolio selection is presented the model can provide an improved criterion for mean risk analysis by injecting a new level of behavioral realism and flexibility while maintaining key normative properties

the performance of forecast based monetary policy rules under model uncertainty we investigate the performance of forecast based monetary policy rules using five macroeconomic models that reflect a wide range of views on aggregate dynamics we identify the key characteristics of rules that are robust to model uncertainty such rules respond to the one year ahead inflation forecast and to the current output gap and incorporate a substantial degree of policy inertia in contrast rules with longer forecast horizons are less robust and are prone to generating indeterminacy in light of these results we identify a robust benchmark rule that performs very well in all five models over a wide range of policy preferences

emissions taxes versus intensity standards second best environmental policies with incomplete regulation the best emissions tax or emissions cap may be an inferior instrument under incomplete regulation leakage without leakage an intensity standard regulating emissions per unit of output is inferior due to an implicit output subsidy this inefficiency can be eliminated by an additional consumption tax with leakage an intensity standard can dominate the optimal emissions tax since the implicit output subsidy prevents leakage the addition of a consumption tax improves an intensity standard s efficiency may prevent leakage and may be efficient comparing intensity standards to output based updating shows that the latter dominates if updating is sufficiently flexible

the impacts of carbon pricing on coastal megacities a cge analysis of singapore abstract pricing carbon is a widely used policy instrument for climate change mitigation quantitative analysis of carbon pricing are mainly conducted at the regional and national level rarely at the city level due to data availability as a representative of coastal megacities that are vulnerable to both climate change and climate policies singapore has announced to impose carbon tax on large direct emitters as a complementary mitigation option to technical measures a city level computable general equilibrium cge model is developed to simulate potential impacts of carbon pricing on the city including paying border carbon adjustment bca on exports or introducing a domestic carbon tax different sector coverages and carbon tax revenue recycling schemes are investigated for domestic carbon tax the simulation results show that a domestic carbon tax is a more cost effective option than paying bca given an identical carbon price at s 10 t co 2 gdp total exports and household consumption would decline less and average abatement cost is much smaller in the carbon tax scenarios compared to the bca scenario in terms of absolute emissions reduction a carbon tax that covers energy manufacturing and land transport sectors would be preferred making emissions around 2 7 lower than 2010 baseline level