The project proposes to investigate two main topics of the applied macroeconomic research with the aim of shedding new light on the existing empirical evidence and of enhancing the econometrical procedures related to the subject matter.
The first topic that I intend to cover with this research project relates to nowcasting techniques and mixed frequency econometrics. In the current literature, these techniques are mainly used to exploit higher-frequency regional data to produce estimates, because the official data for many key macroeconomic regional variables are released with a significant delay and only at annual frequency. In this project, I intend to implement nowcasting and mixed-frequency techniques to improve nowcasts of climate data, which can be used to produce better estimates when we use these data to study the effect of climate shocks.
The second part of the analysis will be dedicated to the study of the macroeconomic effects of climate shock. Waves of excessive heat and excessive cold can interrupt crop growth and reduce yields. Climate change is expected to have an impact on food production, food and energy prices and, finally, on the inflation. Accordingly, weather shocks may drive significant variations in agricultural and energy prices and, hence, of the business cycles. The investigation is tailored to provide empirical evidence on the impact of weather anomalies on output, prices and inflation of the Euro-Area countries. Moreover, I will investigate whether central banks should deal with climate risks, since extreme climate event can threaten also financial stability.
This project proposes to explore the subject matter in two respects: (1) enhance the study of climate shocks by implementing different econometric models, to investigate the impact of numerous types of climate shocks (e.g. droughts, rainfall) and their identification on different sectors of the economy, and (2) to explore the policy implications of climate-related risks.
The work aims at enhancing the existing literature in three aspects: i) it proposes a new identification method to disentangle the contribution of different kinds of climate shocks by means of sign restrictions; ii) it explores the policy implications of climate-related risks, and iii) it applies mixed frequency econometrics and nowcasts techniques to exploit higher-frequency data to produce and improve climate data estimates. Given the data issues highlighted in the previous section, these techniques likely will be of primary interest for the study of climate change at an empirical level. For instance, it is possible to improve nowcasts of climate data, which can be used to produce better estimates when we use these data to study the effect of climate shocks.
With respect to the first point, by implementing a panel VAR with sign restriction identification strategy I intend to retrieve asymmetries in Eurozone countries¿ response to climate shocks. Weather shocks may have significant nonlinear cross-countries effect, which can be an additional source of heterogeneity for Eurozone countries. One important question may be if the ECB has to target variations in inflation triggered by climate shocks.
Moreover, physical losses related to direct damages, higher maintenance costs, disruption and lower labour productivity may ultimately affect profitability and default risk. Uninsured risks deteriorate households and corporations that are hit by climate events and hence their lender banks (Campiglio et al., 2018). At the same time, the recent adjustment towards a low-carbon economy raises numerous policy challenges for central bankers too (Carbone et al., 2018). There is a need to investigate further on whether central banks should deal with climate risks and what are the consequences for both the economic and financial system.
Just recently, the ECB has decided to incorporate climate change considerations into its policy framework. With this decision, the ECB recognises the priority to deal with climate change at institutional level, since climate change and the economy low-carbon transition influence the outlook for price stability through their impact on macroeconomic indicators such as inflation, output, employment, interest rates, investment and productivity; financial stability; and the transmission of monetary policy. The project proposed is intended to provide policy indication, for instance, on whether the benefits of a "green" quantitative easing by the ECB are higher than its costs in terms of both price and financial stability.
Böhringer, Christoph, Jared C. Carbone, and Thomas F. Rutherford. "Embodied carbon tariffs." The Scandinavian Journal of Economics 120.1 (2018): 183-210.
Campiglio, Emanuele, et al. "Climate change challenges for central banks and financial regulators." Nature Climate Change 8.6 (2018): 462-468.
¿ECB presents action plan to include climate change considerations in its monetary policy strategy¿. ECB Press release, (8 July 2021)