Phd Thesis – Florent Mc Isaac presented publicly on the 14th of December 2016 – Université Paris 1, Panthéon Sorbonne.
Ever since the stagflation that followed the oil price run-ups of 1973 and 1979, oil price shocks have been considered one of the most influential sources of economic fluctuation in the United States and other developed countries. A large body of literature has analyzed oil price shocks as sources of variation for leading macroeconomic variables such as GDP growth, unemployment rate, inflation, and wages. However, scholars have yet to reach a consensus as to the true impact of oil shocks on the macroeconomic environment. Furthermore, the last decade has seen the debate intensify as the results of the relatively (in comparison with the 1970s) muted reaction of the real economy during the 2002-6 oil price run-up. Indeed, the recessionary effect was only observed during the subprime mortgage crisis of 2008-9. Numerous hypotheses have been put forward to explain the difference in impact during the 1970s versus the 2000s. For instance, Blanchard & Gali (2009) and Blanchard & Riggi (2013) evoked the reduction of the quantity of oil used of a unit of production, more flexible real wages, and a better credibility of the monetary policy. Hamilton (2009) and Kilian (2008) pinpointed a difference in the nature of the shock: whereas the oil shocks of the 1970s were driven by supply, that of the 2000s was led by demand.
The original aim of this thesis was to reevaluate the impact of the oil shock in the 2000s through the debt channel. First, based on the work of Banchard & Gali, we proposed a new dynamic stochastic general equilibrium model (DSGE), which includes oil as an input of production as well as a consumption good. By relaxing some of the hypotheses of Blanchard & Gali, especially the decoupling of the output elasticity of oil with the cost- share in the production, our work demonstrated that oil is still a fundamental variable of the GDP in the United States. Furthermore, we found that energy efficiency is a key factor that explains the muted macroeconomic impact of an increase in oil prices. A third line of inquiry that may explain the difference between the shocks of the 1970s and the 2000s considers the extra costs implied by a higher price of oil that were absorbed by private debt (which was itself exacerbated by low interest rates set by the Federal Reserve in the 2000s). However, we found that DSGE modeling is unable to replicate the macroeconomic environment that led to the subprime mortgage crisis.
In light of these considerations, I reoriented my thesis along the lines of a new angle of research that seeks to represent economic mechanisms differently. Under this new frame- work, private debt is at the core of macroeconomic analysis. It provides an alternative view of the financial crisis that occurred in the 2000s. The mathematical formalism is provided by Steve Keen, who formalized basic features of Hyman Minsky’s insights. During the 1970s, Minsky sought to analyze the likelihood that a new financial crisis equivalent in magnitude to that of 1929 would be possible. The primary advantage of his framework is its ability to reproduce a financial crisis, such as the subprime mortgage crisis, endogenously. As a result, it is possible to provide public policy recommendations that prevent what we call a “black swan,” or a realization of the tail of a probability distribution. Such a paradigm shift is not without consequence. It necessitates the development of new tools for macroeconomic modeling. Indeed, while DSGE framework is well developed in the academic literature, the study of this new modeling environment is still germinal.
The resulting thesis, which seeks to develop this work, is composed of three articles. The first develops estimation tools suitable for the new framework. It enables the estimation of a multidimensional continuous system in a macroeconomic environment where data is at a low frequency (quarterly). The second article generalizes the production function of the new framework and studies the dynamical properties inherent to this generalization. The last paper calibrates this new macroeconomic environment at a global scale and delineates the effects of climate change on the macroeconomy. Although the most likely scenario would be an economic collapse induced by the financial sphere, we show that if the public policy is strong enough, the collapse can still be avoided provided that the energy shift be enacted swiftly.
The conclusions of this thesis demonstrate great potential for providing foundations for new perspectives in macroeconomic modeling. The papers included in the thesis allow, in particular, for a better understanding of situations that most macroeconomic models are not able to cope with, including the overindebtedness crisis. As a result, the framework introduced here may provide an alternative and improved perspective for public policy. Further development of the research presented in this thesis may lead to the improvement of other frameworks in the field of macroeconomics. This would allow for a better understanding of complex interactions between the financial sphere, real business cycles, energy, and climate in what is certainly the biggest challenge of our generation : the ecological shift.
A first version of an econometric SFC model of the French economy based on the accumulation accounts from INSEE and on the financial accounts of the Bank of France has been presented (Mazier and Reyes, 2022). It provides the overall structure, the main equations and the basic properties of the model. This paper is...