By Raphaelle G. Coulombe, Queen’s University
The ratio of government expenditure to output fluctuated considerably after WW2. As shown in Figure 1, many countries experienced rapid decreases or increases in the share of central government expenditure in output at different points in time. For example, there were instances of sharp decreases in Canada, Italy, and Denmark since the mid-1990s, while the United States and United Kingdom experienced the opposite trend over that same time period.
Christopher Cotton, Ph.D., is a Professor of Economics at Queen’s University, where he holds the Jarislowsky-Deutsch Chair in Economic & Financial Policy and is the Director for the John Deutsch Institute for the Study of Economic Policy.
Before deciding whether we should start to reopen the economy, we need to understand what it is that we are trying to accomplish through the shutdown. If the shutdown is intended to slow the spread of COVID-19 and prevent our health care system from being overwhelmed, then we have room to start slowly loosening shutdown restrictions today. If, however, our objective is to minimize the number of Canadians that become infected or die from the disease, which seems to be the objective of public health officials today, then the shutdown may need to continue indefinitely. Read More »
By James McNeil, Queen’s University
The nominal interest rate can be decomposed into the sum of the real interest rate and expected inflation through an economic relationship called the Fisher equation. While monetary policy typically works by adjusting short-run nominal interest rates, economic theory suggests that it is the real interest rate that influences borrowing and lending decisions. How much of an adjustment to the nominal interest rate passes through to affect the real interest rate – and hence the real economy – will depend on the response of inflation expectations.
Furthermore, central banks may wish to directly influence inflation expectations to avoid falling into a liquidity trap or to achieve additional stimulus when nominal interest rates are exceptionally low. In 2009 the Federal Reserve lowered its policy interest rate to zero, which is considered to be the lower limit, effectively losing its main policy tool. In response, it turned to unconventional monetary policy operations such as forward guidance (promising to keep interest rates low for an extended period of time) and large-scale asset purchase programs (often referred to as Quantitative Easing). If these unconventional policies are able to directly move inflation expectations when short-run nominal interest rates are constrained then the Federal Reserve would have the means to affect real interest rates when its preferred policy tool is not available.Read More »
By Christopher Cotton and Neil Renwick
Christopher Cotton, Ph.D., is a Professor of Economics at Queen’s University where he holds the Jarislowsky-Deutsch Chair of Economic & Financial Policy and is the Director of the John Deutsch Institute for the Study of Economic Policy. Neil Renwick M.D., Ph.D, is a Clinician Scientist and Head of the Laboratory of Translational RNA Biology at Queen’s University and an Associate Attending Physician at The Rockefeller University Hospital in New York City.
Last week, NY Governor Andrew Cuomo issued a plea to the rest of the country: “Help New York. We’re the ones hit right now… We need relief. We need relief for nurses working 12-hour shifts. We need relief for doctors. Help us now and we will return the favor.”
This request is based on the fact that states like New York, New Jersey, and Michigan are being hit hardest by the COVID-19 pandemic now, and are likely to see their apex in the next week or two, while other states are unlikely to reach their peak until later this spring. Today, as New York faces a shortage of health care workers, there are other places in the U.S. with excess medical capacity, where doctors and nurses not yet being pushed beyond their breaking point.
We claim such an argument not only applies to doctors and nurses but also applies to life-saving ventilators as well.Read More »
By Thorsten Koeppl
Thor Koeppl is a Professor of Economics and RBC Fellow at Queen’s University. He also serves as a Scholar and member of the National Council and Monetary Policy Council at the CD Howe Institute.
Imagine you are driving your car on an alpine road. You see some rocks starting to fall, a rockslide! What do you do? Slam on the brakes. Stop. You take a deep breath and, after a sigh of relief that you kind of dodged it, you think: So, what’s next? How do I get past that rock slide?
This is where we are at in Canada in our response to the current CoVid-19 pandemic. We brought the economy pretty much to a full stop. It is fair to say that this reaction will likely save Canadians being fully engulfed in the rock slide. We yet do not know how big the benefit will be in terms of lives saved or how large the costs will be on the economic side, but we did the right thing. Act on the side of caution and hit the brakes.
Soon, hopefully, there comes the time to catch a breath and look forward to see how we can navigate the medium-run fall out from the pandemic. And this is where economists and the way they tend to think can help us a lot. After all, economists are “social engineers” that deal with problems where individual behaviour needs to be steered in the right direction to achieve better outcomes for society.Read More »
By Beverly Lapham, Queen’s University
The nominal exchange rate between Canada and the U.S. fluctuates considerably over time. These fluctuations affect Canadian retailers in at least two ways. Firstly, exchange rate movements affect retail price differences between the two countries (see [3]). In response to these price differences, consumers travel across the U.S.-Canada border to purchase goods in the country with lower prices. This is illustrated in the figure below which shows that nominal exchange rates are correlated with cross-border travel by Canadians. Hence, through travel responses, Canadian dollar appreciations tend to decrease demand, revenue, and profits for Canadian retailers. Secondly, because Canadian retailers often use imported inputs, movements in exchange rates may cause fluctuations in retailers’ costs. Thus, Canadian dollar appreciations tend to decrease costs and increase profits of Canadian retailers. My research with co-authors estimates the effect of exchange rate fluctuations on heterogeneous Canadian retailers’ revenues and profits and examines the impact of changes in border policies on those relationships.[1][2]
By Eliane Hamel Barker and Ardyn Nordstrom, Queen’s University
Last November, the Economics and Psychology departments at Queen’s University were pleased to welcome Dr. Anita Tusche as assistant professor and Queen’s National Scholar. The Queen’s Economics Department is delighted to be welcoming , and would like to take this opportunity to introduce the Queen’s community to Dr. Tusche’s work. Before joining Queen’s, Dr. Anita Tusche completed her PhD in Psychology in Berlin, Germany and continued with Postdoctoral research at the Max Planck Institute for Human Cognitive and Brain Sciences and then the California Institute of Technology. Most of Dr. Tusche’s research is in the exciting new field of neuroeconomics, which is at the intersection of behavioral economics, psychology, neuroscience and computational modelling. At the core of her research is the aim to understand the mechanisms that drive people’s differences in decision making by using computational models on data collected from computer experiments, eye-movement measurements to determine what people pay attention to, and functional and structural brain data.
By Eric Richert, Queen’s University
On November 16-17th the second workshop on the economics of strategic communication and persuasion was hosted by CIRANO, CIREQ, the John Deutsch Institute and the Dean of Arts Development Fund at CIRANO in Montreal. The keynote speaker was Joel Sobel who presented on “Sequential versus simultaneous disclosure”. Six other papers were presented in this workshop.Read More »
By Gregor W. Smith, Queen’s University
The Bank of Canada often describes inflation targeting as flexible. For example, the preamble to its October 2018 Monetary Policy Report says:
“Canada’s inflation-targeting framework is flexible. Typically, the Bank seeks to return inflation to target over a horizon of six to eight quarters. However, the most appropriate horizon for returning inflation to target will vary depending on the nature and persistence of the shocks buffeting the economy.” [3]
The flexibility thus involves a deferral in the planned return of the inflation rate to 2%, the mid-point of the target range. This deferral is applied because policy is being used to respond to some other goal. One can read more about this strategy in speeches by Bank of Canada officials or in the background documents at the last two renewals of the inflation target [1,2].Read More »
By Peter Shannon, Queen’s University
Battles over climate change policy between state, provincial, and federal governments have been a common occurrence in 2018. In April, the Environmental Protection Agency started a row with California over emissions standards. Then EPA administrator Scott Pruitt announced that it would repeal automobile emissions standards set by the Obama administration and threatened to waive individual states’ power to set their own emissions standards if California was unwilling to negotiate over its own higher pollution and mileage standards. California’s Attorney General replied that California was prepared to sue the EPA if necessary to maintain its current regulations. [1] California followed through on this promise, filing a lawsuit with 16 other states in May. [2] The disagreement over emissions policy extends far beyond automobile standards: California is the only US state with a complete carbon market, although nine northeastern states have tradable emissions caps that apply only to power producers. Meanwhile, the President Trump withdrew America from the Paris climate accord, scoffed at the notion of federal climate change policy and claimed scientists predicted the polar ice caps “were going to be gone by now, but now they’re setting records.” [3] With the battle over carbon policy becoming one of the most significant issues in Californian politics, it is worth asking whether carbon pricing is a worthwhile policy and if so, which level of government should handle carbon emissions policy.
Economics and Policy 