ASA researchers participated in the 12h International Conference on Computational and Financial Econometrics

Abstract

The macroeconomic and financial market impact of rare large disasters has since the Great Recession of the years 2007/9 been studied in much literature. Those disasters are seen to have both large real effects (capital and output losses) and financial market effects (shift of discount rates, risk premia, asset prices, and returns). Such effects of large financial crashes studied in financial economics are also shown to be essential for climate-related rare disasters. Insights of the former are used to study the effects of disaster risks in the macroeconomics of climate change. The empirics of disaster risks in climate economics shows a link between GDP growth, greenhouse gas emission, climate change and climate-related disasters. The proposed model uses calibrated rare large disaster shocks and their effects on output and capital losses and rising risk premia in a multi-phase dynamic decision model. We build on previous works which develop such a multi-phase decision model. The model is solved via the non-linear programming method AMPL which is augmented by an arc parametrization method (APM). The proposed method can deal with regime shifts, arising from large disaster shocks, in a multi-regime model. Such a model is also suitable to include fiscal and financial policies to address the issue of mitigation of and adaptation to disaster risks.

Abstract

The introduction of fiscal instruments into DICE model is considered in order to smooth the transition to low-carbon economy and to improve the intergenerational fairness. Namely, we introduce green bonds and taxation for possibility of wealth redistribution in order to pay for the mitigation efforts. The two modeling assumptions are explored: the internal debt and the external debt. While modeling internal debt, we use a portfolio approach for households that allows for them to choose the optimal proportion between bonds and capital investments. We obtain via theoretical investigation and model simulation that the external debt may help improvement of intergenerational fairness with respect to optimal DICE scenario. The internal debt does not however lead to improvement of intergenerational fairness but provides the incentives for investing in CO2 abatement and helps to smooth a carbon tax.