Tag Archives: Pigouvian tax

Nordhaus on Climate Change

In his Nobel lecture (reprinted in the June issue of the American Economic Review), William Nordhaus concludes that we should focus on four goals:

First, people around the world need to understand and accept … Those who understand the issue must speak up and debate contrarians who spread false and tendentious reasoning. …

Second, nations must establish policies that raise the price of CO2 and other greenhouse-gas emissions. …

Moreover, we need to ensure that actions are global and not just national or local. … The best hope for effective coordination is a climate club, which is a coalition of nations that commit to strong steps to reduce emissions along with mechanisms to penalize countries who do not participate. …

Finally, … [d]eveloping economical low-carbon technologies will lower the cost of achieving our climate goals. Moreover, if other policies fail, low-carbon technologies are the last refuge—short of the salvage therapy of geoengineering—for achieving our climate goals or limiting the damage.

“Regulierung und Wettbewerb (Regulation and Competition),” FuW, 2017

Finanz und Wirtschaft, December 13, 2017. PDF. Ökonomenstimme, December 15, 2017. HTML.

  • Regulation is about aligning private and social trade-offs.
  • When banks cause negative externalities, good regulatory interventions increase banks’ costs.
  • Externalities may differ across countries, so nothing suggests that regulation induced costs should be the same internationally.

“Politico-Economic Equivalence,” RED, 2015

Review of Economic Dynamics 18(4), October 2015, with Martín Gonzalez-Eiras. PDF.

Traditional “economic equivalence” results, like the Ricardian equivalence proposition, define equivalence classes over exogenous policies. We derive “politico-economic equivalence” conditions that apply in environments where policy is endogenous and chosen sequentially. A policy regime and a state are equivalent to another such pair if both pairs give rise to the same allocation in politico-economic equilibrium. The equivalence conditions help to identify factors that render institutional change non-neutral and to construct politico-economic equilibria in new policy regimes. We exemplify their use in the context of several applications, relating to social security reform, tax-smoothing policies and measures to correct externalities.

“Toward a Run-Free Financial System”

In the tenth chapter of “Across the Great Divide: New Perspectives on the Financial Crisis,” John Cochrane argues that at its core, the financial crisis was a run and thus, policy responses should focus on mitigating the risk of runs (blog posts by Cochrane on the same topic can be found here and here). Some excerpts:

… demand deposits, fixed-value money-market funds, or overnight debt … [should be] backed entirely by short-term Treasuries. Investors who want higher returns must bear price risk. …

Banks can still mediate transactions, of course. For example, a bank-owned ATM machine can deliver cash by selling your shares in a Treasury-backed money market fund … Banks can still be broker-dealers, custodians, derivative and swap counterparties and market makers, and providers of a wide range of financial services, credit cards, and so forth. They simply may not fund themselves by issuing large amounts of run-prone debt.

If a demand for separate bank debt really exists, the equity of 100 percent equity-financed banks can be held by a downstream institution or pass-through vehicle that issues equity and debt tranches. That vehicle can fail and be resolved in an hour …

Rather than outlawing short-term debt, Cochrane suggests to levy corrective taxes on run-prone liabilities. Moreover:

… technology allows us to overcome the long-standing objections to narrow banking. Most deeply, “liquidity” no longer requires that people hold a large inventory of fixed-value, pay-on-demand, and hence run-prone securities.

… electronic transactions can easily be made with Treasury-backed or floating-value money-market fund shares, in which the vast majority of transactions are simply netted by the intermediary. … On the supply end, $18 trillion of government debt is enough to back any conceivable remaining need for fixed-value default-free assets.

Cochrane rejects the claim that the need for money-like assets can only be met by banks that “transform” maturity or liquidity. He argues that current regulation reflects a history of piecemeal responses that triggered the need for additional measures; and he points out that the shadow banking system creates run risks because a “broker-dealer may have used your securities as collateral for borrowing” to fund proprietary trading.

Cochrane debunks crisis lingo and clarifies links between aggregate variables:

The only way to consume less and invest less is to pile up government debt. So a “flight to quality” and a “decline in aggregate demand” are the same thing.

He questions the need for fixed value securities other than short-term government debt as means of payment or savings vehicle; offers a short history of financial regulation; and deplores regulatory discretion.