Showing papers by "Rick van der Ploeg published in 2016"

Shifting Frontiers in Global Resource Wealth: The Role of Policies and Institutions

Abstract: This paper explores the impact of increased market orientation and improved institutions on global resource wealth using a novel dataset of major hydrocarbon and mineral discoveries. Guided by the predictions of a two-region model, we employ an instrumental variable strategy to test whether increased market orientation boosts discoveries. Our results indicate that if Latin America and sub-Saharan Africa were to adopt the same quality of institutions as the United States, discoveries worldwide would increase by 25 percent. Our results support the primacy of institutions by calling into question the commonly held view that resource endowments are exogenous.

Stranded Assets, the Social Cost of Carbon, and Directed Technical Change: Macroeconomic Dynamics of Optimal Climate Policy

Abstract: The tractable general equilibrium model developed by Golosov et al. (2014), GHKT for short, is modified to allow for stock-dependent fossil fuel extraction costs and partial exhaustion of fossil fuel reserves, a negative impact of global warming on growth, mean reversion in climate damages, steady labour-augmenting technical progress, specific green technical progress driven by learning by doing, population growth, and a direct effect of the stock of atmospheric carbon on instantaneous welfare. We characterize the social optimum and derive simple rule for both the optimal carbon tax and the renewable energy subsidy, and characterize the optimal amount of untapped fossil fuel.

Saving Alberta's Resource Revenues: Role of Intergenerational and Liquidity Funds

Abstract: We use a welfare-based intertemporal stochastic optimization model and historical data to estimate the size of the optimal intergenerational and liquidity funds and the corresponding resource dividend available to the government of the Canadian province Alberta. To first-order of approximation, this dividend should be a constant fraction of total above- and below-ground wealth, complemented by additional precautionary savings at initial times to build up a small liquidity fund to cope with oil price volatility. The ongoing dividend equals approximately 30 per cent of government revenue and requires building assets of approximately 40 per cent of GDP in 2030, 100 per cent of GDP in 2050 and 165 per cent in 2100. Finally, the effect of the recent plunge in oil prices on our estimates is examined. Our recommendations are in stark contrast with historical and current government policy.

Macro Policy Responses To Natural Resource Windfalls

Abstract: Policy prescriptions for managing natural resource windfalls are based on the permanent income hypothesis: none of the windfall is invested at home and saving in an intergenerational SWF is dictated by smoothing consumption across different generations. Furthermore, with Dutch disease effects the optimal response is to intertemporally smooth the real exchange rate, smooth public and private consumption, and limit sharp fluctuations in the intersectoral allocation of production factors. We show that these prescriptions need to be modified for the following reasons. First, to cope with volatile commodity prices precautionary buffers should be put in a stabilisation fund. Second, with imperfect access to capital markets the windfall must be used to curb capital scarcity, invest domestically and bring consumption forward. Third, with real wage rigidity consumption must also be brought forward to mitigate transient unemployment. Fourth, the real exchange rate has to temporarily appreciate to signal the need to invest in the domestic economy to gradually improve the ability to absorb the extra spending from the windfall. Fifth, with finite lives the timing of handing back the windfall to the private sector matters and consumption and the real exchange rate will be volatile. Finally, with nominal wage rigidity we show that a Taylor rule is a better short-run response to a crash in commodity prices than a nominal exchange rate peg.

Second-Best Renewable Subsidies to De-Carbonize the Economy: Commitment and the Green Paradox

Abstract: Climate change must deal with two market failures: global warming and learning by doing in renewable use. The first-best policy consists of an aggressive renewables subsidy in the near term and a gradually rising and falling carbon tax. Given that global carbon taxes remain elusive, policy makers have to use a second-best subsidy. In case of credible commitment, the second-best subsidy is set higher than the social benefit of learning. It allows the transition time and peak warming close to first-best levels at the cost of higher fossil fuel use (weak Green Paradox). If policy makers cannot commit, the second-best subsidy is set to the social benefit of learning. It generates smaller weak Green Paradox effects, but the transition to the carbon-free takes longer and cumulative carbon emissions are higher. Under first-best and second best with pre-commitment peak warming is 2.1-2.3 °C, under second best without commitment 3.5°C, and without any policy temperature 5.1°C above pre-industrial levels. Not being able to commit yields a welfare loss of 95% of initial GDP compared to first best. Being able to commit brings this figure down to 7%.