27/06/2018 #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT 27/06/2018 #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 0/72 AGENCY
GEMMES - ISEO 27, J UNE 2018 Gaël Giraud Chief Economist | AFD Senior researcher | CNRS Professor | ENPC Director | Energy et Prosperity Chair #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 0/72 AGENCY
� Summary Introduction 1 Research program Gemmes research programme 2 Gemmes: the model 3 Basics Introduction 4 Research program Related Literature 5 Modeling set-up 6 The macroeconomic core The climate module Target achievements 7 Modeling uncertainty 8 Climate prospective 9 Scope of analysis Scenario analysis 10 Concluding remarks #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 1/72
� Outlines 1 Introduction Research program 2 Gemmes research programme 3 Gemmes: the model 4 Introduction 5 Related Literature 6 Modeling set-up 7 Target achievements 8 Modeling uncertainty 9 Climate prospective 10 Concluding remarks #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 2/72
� Introduction The 2008 crisis: a revival of Minsky’s theory of financial instability Nonfinancial Business; Credit Market Instruments; Liability, Level/Gross Domestic Product (left) Civilian Unemployment Rate (right) 11.2 5 10.4 4 9.6 3 8.8 2 % Chg. of (Bil. of $/Bil. of $) 8.0 1 Percent 7.2 0 6.4 -1 5.6 -2 4.8 -3 4.0 -4 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 fred.stlouisfed.org myf.red/g/7Dv0 Figure: Time series of the private debt ratio and employment rate in the United States over the period 1990-2010. #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 3/72
� Introduction A “New normal"? (1) Figure: Quantitative Easing vs inflation, US. #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 4/72
� Introduction A “New normal"? (2) Figure: Public debt vs spread, US. #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 5/72
� Introduction Failure of standard models Figure: Troïka’s predictions on the Greek GDP ... #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 6/72
� Introduction Dynamic Stochastic General Equilibrium (DSGE) 1 . All the present and future variables are simultaneously at equilibrium 2 . People maximize their individual utility (or profit) perfectly anticipating the future. 3 . Returns to scale are decreasing by assumption. 4 . Equilibrium is only disrupted by exogenous shocks but is always locally asymptoti- cally stable 5 . Money is neutral and there is no banking sector. 6 . Private debts don’t matter. 7 . Inequalities don’t matter. 8 . Energy and matter don’t matter. 9 . Climate backloops are harmless. #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 7/72
� Introduction The trouble with macroeconomics � Blanchard (PIIE, 2016): I see the current DSGE models as seriously flawed... � Romer (2016): For more than three decades, macroeconomics has gone backwards... � Kocherlakota (2016): ...we simply do not have a settled successful theory of the macroeconomy. The choices made 25-40 years ago - made then for a number of excellent reasons - should not be treated as written in stone or even in pen. #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 8/72
� Introduction Micro-foundations? Figure: Sonnenschein-Mantel-Debreu (1975) #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 9/72
� Introduction Rational expectations? � Cass & Stiglitz (1969) : trajectories with rational expectations are not locally stable in the space of trajectories with expectations. � In the parlance of Guesnerie (2006) : REE are not eductively stable. #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 10/72
� Introduction The Price-taking paradigm 1 . Suppose you wanna travel from Iseo to Roma as quickly as possible... ∂ q i = 0 and dp ∂ p 2 . dQ < 0 are mutually incompatible (unless each firm is atomless): 0 = ∂ p dp ∂ Q = ∂ q i dQ ∂ q i dp dQ < 0 . = #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 11/72
� Introduction The Price-taking paradigm 1 . The conventional solution to Max q i π ( q i ) = p · q i − c i ( q i ) is not individually optimal (unless each firm is atomless): π ( q i + dq i ) − π ( q i ) = p ( Q + dq i )( q i + dq i ) − c i ( q i + dq i ) − p ( Q ) q i + c i ( q i ) dp dQ + d 2 q i − c ′ ≃ p ( Q ) dq i + q i dq i i ( q i ) dq i dp dQ < 0 ≃ q i dq i #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 12/72
� Introduction The Price-taking paradigm 1 . d π ∂π dq j � := ∂ q j dQ dQ j � dq j ∂ � = � p ( Q ) q i − c i ( q i ) ∂ q j dQ j � dq i dq j dp ( Q ) � � p − c ′ = i ( q i ) dQ + q i dQ , dQ j 2 . In the symmetric case: dQ − � j � = i dq j dq i = dQ dQ 1 − ( n − 1 ) dq i = dQ , 3 . dp ( Q ) = p ( Q ) + Q dp ( Q ) c ′ (1) i ( q i ) = p ( Q ) + nq i . dQ dQ #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 13/72
� Introduction The Price-taking paradigm 1 . The price-taking solution coincides with the monopolistic one. 2 . Hence, it is Pareto-suboptimal. 3 . Discontinuity of the price-taking solution when n → + ∞ . ( � = Mas-Collel ()). 4 . Perfect competition makes sense only with an atomless space of firms. In the “real” world ( n < + ∞ ), competition is always imperfect. 5 . Stigler (1954), Keen & Standish (2006), Giraud et al. (2018). #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 14/72
� Summary Introduction 1 Research program Gemmes research programme 2 Gemmes: the model 3 Basics Introduction 4 Research program Related Literature 5 Modeling set-up 6 The macroeconomic core The climate module Target achievements 7 Modeling uncertainty 8 Climate prospective 9 Scope of analysis Scenario analysis 10 Concluding remarks #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 15/72
� II. Debts and credit Figure: Keen (2017) #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 16/72
� Debts and credit 7 Figure: Keen (2017) #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 17/72
� Debts and credit Figure: UK (Keen (2017)) #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 18/72
� Debts and credit Figure: Keen (2017) #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 19/72
� Gemmes research programme Key research highlights 1 . Combine three potential sources of global instabilities (climate, finance and in- equalities) in a minimal and consistent framework to provide prospective analysis insights on the climate-economy interactions 2 . Identify the instability factors and their transmission channels (in particular the piv- otal role of private debt) through non-linear dynamics. 3 . Provide public policy guidance for the implementation of the Paris Agreement to contain global warming “well below” +2 ◦ C. 4 . Provide insight on the impact of natural resource scarcity: biodiversity, energy, min- erals... 5 . Help drive the social-ecological transition. #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 20/72
� Summary Introduction 1 Research program Gemmes research programme 2 Gemmes: the model 3 Basics Introduction 4 Research program Related Literature 5 Modeling set-up 6 The macroeconomic core The climate module Target achievements 7 Modeling uncertainty 8 Climate prospective 9 Scope of analysis Scenario analysis 10 Concluding remarks #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 21/72
� Gemmes: the model – Theoretical elements � Minimum (bounded) rationality in a stock-flow consistent set-up. � Mathematical formalization of Minsky’s moment ◮ Lotka-Volterra relationship linking the employment rate to the wage share ◮ Dynamics of the private debt of firms + endogenous creation of non-neutral money by banks. � Phenomenological empirical approach to ground aggregate behavior: investment, consumption, short-term Phillips curve (Mankiw (2010) [ ? ] , Gordon (2014), Krug- man (2014)). � Endogenous business cycles � Multiplicity of long-term equilibria: ◮ A desirable steady-state equilibrium ◮ A bad attractor leading to a breakdown #WorldInCommon AGENCE FRANÇAISE DE DÉVELOPPEMENT | FRENCH DEVELOPMENT AGENCY 22/72
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