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1. Macroeconomic Modeling in the Anthropocene

Author:
Yannis Dafermos, Andrew McConnell, Maria Nikolaidi, Servaas Storm, and Boyan Yanovski
Publication Date:
10-2024
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Recent years have seen an increasing use of environmental dynamic stochastic general equilibrium (E-DSGE) models for analyzing the macroeconomic effects of the climate crisis. This paper explores to what extent these models are fit for purpose. We identify the limitations of the benchmark E-DSGE framework and explain how these limitations restrict the ability of this framework to meaningfully capture the macroeconomics of the climate crisis. We then explain how the assumptions behind these limitations can be relaxed, but argue that simply relaxing some of these assumptions in isolation is insufficient to address the problem. We therefore call for a broader use of other macroeconomic models, such as ecological stock-flow consistent (E-SFC) and ecological agent-based (E-AB) models, that address these limitations simultaneously. We explain how these models do not suffer from the pitfalls of the E-DSGE framework and outline how they need to improve to increase their usefulness as tools that can inform macroeconomic policy making in the Anthropocene.
Topic:
Climate Change, Environment, Monetary Policy, and Macroeconomics
Political Geography:
Global Focus

2. The Art of Paradigm Maintenance: How the ‘Science of Monetary Policy’ tries to deal with the inflation of 2021-2023

Author:
Servaas Storm
Publication Date:
10-2023
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The macroeconomic models used by major institutions including the Federal Reserve and the International Monetary Fund (IMF) failed to predict the inflation surge during 2021-2023. The output gap, the unemployment gap, the New Keynesian Phillips curve and inflation expectations did not give timely and relevant signals. The re-emergence of inflation thus threw the ‘science of monetary policy’ off the rails. Faced with the choice between changing their paradigm and proving that there is no need to do so, the ‘scientists of monetary policy’ got busy on the proof. As a result, a number of ad-hoc epicycles have been added to the New Keynesian analytical core—with the help of which one can claim to be able to explain the sudden acceleration of inflation post-factum. This paper critically reviews the theoretical and empirical merits of three recent tweaks to the New Keynesian core: using the vacancy ratio as the appropriate measure of real economic activity; hammering on the considerable risk of an imminent wage-price spiral; and the resurrection of the non-linear Phillips curve. The paper concludes by drawing out sobering lessons concerning the art of paradigm maintenance as practiced by the ‘scientists of monetary policy’.
Topic:
Economics, Monetary Policy, Institutions, Inflation, and Macroeconomics
Political Geography:
Global Focus

3. Inflation in the Time of Corona and War

Author:
Servaas Storm
Publication Date:
06-2022
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Reliance on established macroeconomic thinking is not of much use in trying to understand what to do in response to the constellation of forces driving up inflation in these times of COVID-19 and war. This paper attempts to reduce the heat and turn up the light in the debate on the return of high inflation and looming stagflation—by providing evidence-based answers to the main (policy) questions concerning the return of high inflation: is the increased inflation due to (global) supply and/or demand factors? Is the inflation in the US exceptional or are other OECD and emerging economies experiencing similar inflationary pressures? Is the increase in inflation permanent or transitory? Can the Fed safely bring down inflation? Is fiscal policy the underlying cause of inflation? Are there alternative, less socially costly, ways to bring inflation down? And what will happen to inflation in the longer run, when the US and other economies will face the impacts of global warming?
Topic:
Economics, War, Inflation, and COVID-19
Political Geography:
Global Focus

4. Inflation in the Time of Corona and War: The Plight of the Developing Economies

Author:
Servaas Storm
Publication Date:
11-2022
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Reliance on established macroeconomic thinking is not of much use in trying to understand what to do in response to the constellation of forces driving up inflation and slowing down growth in these times of COVID-19 and war. This paper attempts to reduce the heat and turn up the light in the debate on the return of high inflation and looming stagflation—by providing evidence-based answers to key (policy) questions concerning the return of high inflation: How close are the parallels between the current conjuncture and the 1970s? What are the differences? Does what is currently happening already amount to stagflation? Can central bankers engineer a ‘soft landing’ of their economies or are we already poised for a deep (global) recession? What are the likely spill- over effects of monetary tightening in the US on the emerging economies? What, if anything, can we learn from the monetary and fiscal policy experiences and policy mistakes of the 1970s? And, finally, are there alternative, less socially costly, ways to bring inflation down?
Topic:
Economics, War, Conflict, Inflation, Pandemic, and COVID-19
Political Geography:
Global Focus

5. Cordon of Conformity: Why DSGE models Are Not the Future of Macroeconomics

Author:
Servaas Storm
Publication Date:
02-2021
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The Rebuilding Macroeconomic Theory Project, led by David Vines and Samuel Wills (2020), is an important, albeit long overdue, initiative to rethink a failing mainstream macroeconomics. Professors Vines and Wills, who must be congratulated for stepping up to the challenge of trying to make mainstream macroeconomics relevant again, call for a new multiple-equilibrium and diverse (MEADE) paradigm for macroeconomics. Their idea is to start with simple models, ideally two-dimensional sketches, that explain mechanisms that can cause multiple equilibria. These mechanisms should then be incorporated into larger DSGE models in a new, multiple-equilibrium synthesis – to see how the fundamental pieces of the economy fit together, subject to it being ‘properly micro-founded’. This paper argues that the MEADE paradigm is bound to fail, because it maintains the DSGE model as the unifying framework at the center of macroeconomic analysis. The paper reviews 10 fundamental weaknesses inherent in DSGE models which make these models irreparably useless for macroeconomic policy analysis. Mainstream macroeconomics must put DSGE models, once and for all, in the Museum of Implausible Economic Models – and learn important lessons from non-DSGE macroeconomic approaches.
Topic:
Economics, Economic Growth, Macroeconomics, Money, Demand, and Models
Political Geography:
Global Focus

6. Lessons for the Age of Consequences: COVID-19 and the Macroeconomy

Author:
Servaas Storm
Publication Date:
03-2021
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Based on comparative empirical evidence for 22 major OECD countries, I argue that country differences in cumulative mortality impacts of SARS-CoV-2 are largely caused by: (1) weaknesses in public health competence by country; (2) pre-existing country-wise variations in structural socio-economic and public health vulnerabilities; and (3) the presence of fiscal constraints. The paper argues that these pre-existing conditions, all favorable to the coronavirus, have been created, and amplified, by four decades of neoliberal macroeconomic policies – in particular by (a) the deadly emphasis on fiscal austerity (which diminished public health capacities, damaged public health and deepened inequalities and vulnerabilities); (b) the obsessive belief of macroeconomists in a trade-off between ‘efficiency’ and ‘equity’, which is mostly used to erroneously justify rampant inequality; (c) the complicit endorsement by mainstream macro of the unchecked power over monetary and fiscal policy-making of global finance and the rentier class; and (d) the unhealthy aversion of mainstream macro (and MMT) to raising taxes, which deceives the public about the necessity to raise taxes to counter the excessive liquidity preference of the rentiers and to realign the interests of finance and of the real economy. The paper concludes by outlining a few lessons for a saner macroeconomics.
Topic:
Global Recession, Economic Inequality, Macroeconomics, Austerity, Public Health, COVID-19, Health Crisis, and Public Spending
Political Geography:
Global Focus

7. Labor Institutions and Development Under Globalization

Author:
Servaas Storm and Jeronim Capaldo
Publication Date:
07-2019
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Labor market regulation is a controversial area of public policy in both developed and developing countries. After decades of de-regulatory advice, international financial institutions have recently come to a less extreme position. But any concessions to labor regulation are based on concerns for social stability or for short-term support to aggregate demand, while regulation continues to be viewed as harmful to economic efficiency. In this paper we take a deeper look at the impact of labor institutions on economic development in two ways. First, we propose a macroeconomic model with balance-of-payments constraint for a “small” developing country open to trade and foreign capital. This helps us clarify the importance of a dynamic view of economic efficiency, as opposed to the static view embedded in mainstream policy advice. Secondly, we discuss the political economy of labor regulation. We argue that labor institutions promote economic development though positive effects on aggregate demand, labor productivity and technology.
Topic:
Economics, Labor Issues, Regulation, Labor Market, and Labor Cost
Political Geography:
Global Focus

8. Economic Growth and Carbon Emissions: The Road to ‘Hothouse Earth’ is Paved with Good Intentions

Author:
Miriam Schröder and Servaas Storm
Publication Date:
11-2018
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
All IPCC (2018) pathways to restrict future global warming to 1.5°C (and well below an already dangerous 2°C) involve radical cuts in global carbon emissions. Such decarbonization, while being technically feasible, may impose a ‘limit’ or ‘planetary boundary’ to growth, depending on whether or not human society can decouple economic growth from carbon emissions. Decoupling is regarded viable in global and national policy discourses on the Paris Agreement—and claimed to be already happening in real time: witness the recent declines in territorial CO2 emissions in a group of more than 20 economies. However, some scholars argue that radical de-carbonization will not be possible while increasing the size of the economy. This paper contributes to this debate as well as to the larger literature on climate change and sustainability. First, we develop a prognosis of climate-constrained global growth for 2014-2050 using the Kaya sum rule. Second, we use the Carbon-Kuznets-Curve (CKC) framework to empirically assess the effect of economic growth on CO2 emissions using measures of both territorial (production-based) emissions and consumption-based (tradeadjusted) emissions. We run panel data regressions using OECD ICIO CO2 emissions data for 61 countries during 1995-2011; to check the robustness of our findings we construct and use panel samples sourced from alternative databases (Eora; Exio; and WIOD). Even if we find evidence suggesting a decoupling of production-based CO2 emissions and growth, consumption-based CO2 emissions are monotonically increasing with per capita GDP (within our sample). We draw out the implications of these findings for climate policy and binding emission reduction obligations.
Topic:
Climate Change, Economic Growth, Carbon Emissions, and Paris Agreement
Political Geography:
Global Focus

9. Carbon Emissions and Economic Growth: Production-based versus Consumption-based Evidence on Decoupling

Author:
Goher-Ur-Reham Mir and Servaas Storm
Publication Date:
03-2016
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Working Paper Carbon Emissions and Economic Growth: Production-based versus Consumption-based Evidence on Decoupling MAR 2016 | ENERGY | ENVIRONMENT SHARE WORKING PAPER SERIES BY Goher-Ur-Rehman Mir Ecofys Consulting Servaas Storm Senior Lecturer of Economics, Delft University of Technology DOWNLOAD PAPER We assess the Carbon-Kuznets-Curve hypothesis using internationally consistent and comparable production-based versus consumption-based CO2 emissions data for 40 countries (and 35 industries) during 1995-2007 from the World Input Output Database (WIOD). The estimates for per capita CO2 emissions are truly comprehensive as these include all carbon emissions embodied in international trade and global commodity chains. Even if we find evidence suggesting a decoupling of production-based CO2 emissions and growth, consumption- based CO2 emissions are monotonically increasing with per capita GDP. We draw out the implications of these findings for climate policy and binding emission reduction obligations.
Topic:
Climate Change, Energy Policy, Environment, Economic Growth, and Carbon Emissions
Political Geography:
Global Focus