Research

Climate change is widely perceived as one of the most important issues facing humanity.  This paper investigates the macroeconomic effects of climate change anticipation via individual savings. I incorporate climate damages as a non-stationary shift in the stochastic productivity process into a general equilibrium model featuring idiosyncratic income shocks, incomplete markets and individual climate beliefs. Climate change awareness incentivizes savings, so that capital supply increases in the short run, mitigating the negative effects of climate change. An average underestimate of economic impacts disproportionally hurts asset-poor individuals and thus contributes to inequality. Dispersion in beliefs about the aggregate process exacerbates undersaving of unconcerned individuals due to downward pressure on the interest rate caused by the more concerned. This mechanism hurts mostly wealthy agents, while the asset-poor benefit from the positive effect on wages. UK survey data confirms the relationship between individual savings and climate change concern. Competing effects of a low marginal propensity to save and a high relative marginal value of saving in low states close to the borrowing constraint rationalize the observed heterogeneity across the population.

The substantial spread in climate projections from large-scale climate models complicates the derivation of optimal climate policies, but is also an important reminder of the limited predictability of the climate system. We build Integrated Assessment Models (IAMs) reflecting this range of temperature projections using novel linear response theory and Lasso regression-based CMIP6 temperature emulators. This allows a quantification of the policy impact of concern over climate model uncertainty under a range of preference specifications. Under expected utility maximization, the optimal policy includes full decarbonization from 2075 onwards, even though this is only the case for 30% of CMIP6 models when modeled separately. Mitigation increases with robustness concerns, but decreases when weighting climate models by historical performance.

We develop a dynamic general equilibrium model with sectoral heterogeneity and an endogenous aggregate energy substitutability that responds to climate policy. The social planner optimum is attained by taxing emissions uniformly. This uniform emissions tax leads to reallocation on all levels: within the electricity, energy and intermediate sectors and also across intermediate sectors. A low substitutability across sectors or between energy and other inputs decreases the efficacy of a carbon tax.

Extending a buffer-stock model of a government which balances economic stabilization and debt sustainability, this paper models a forward-looking government that considers growth, market-access, currency, and other stock-flow adjustment risks to optimize its fiscal stance. We recognize a trade-off: while the lower effective real interest rates of FX debt can provide more fiscal space, risks of adverse debt valuation effects due to currency depreciation reduce this space. This may call for additional buffers. We provide a fiscal stance path advice for Mexico, where 30 percent of public debt is in foreign currency. We also use the model to provide a debt target and a range of values for the primary balance consistent with a given tolerance for debt risks. We discuss results’ sensitivity, including with respect to the share of FX debt, the persistence of exchange rate movements, adjustments costs or stock-flow adjustment shocks beyond those induced by FX debt. Lastly, we provide a toolkit to facilitate applications to other countries.