Browsing by Subject "networks"

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  • Itkonen, Juha (2017)
    Bank of Finland Research Discussion Papers 20/2017
    We model a network of linked permit markets to examine efficiency and dependencies between the markets in a competitive equilibrium. Links enable the participants of one emissions trading system to use the permits of another system. To improve the cost-efficiency of the international policy architecture, the Paris climate agreement set out a framework for linking local policies. International trade in permits reduces costs by merging markets, but in a large network it is generally not obvious which markets end up linked in the equilibrium. Also, indirect links might allow foreign regulators to undermine domestic policy outcomes. We apply graph theory to study dependencies between markets and to determine how the network is partitioned into separate market areas. Our main theorem characterizes the dependency structure of the equilibrium in an exogenous trading network. We show that markets merge when they are connected by a particular pattern of links. The results help to identify potential sources of both cost reductions and foreign interference, and to secure the efficiency of climate change policies.
  • Itkonen, Juha V.A. (2015)
    Bank of Finland. Scientific monographs. E 49
    Climate change is one of the greatest market failures of our time. This thesis consists of three essays in which we study the economics of climate change using networks as a theoretical framework. In the first essay, we discover flaws in the foundations of a recent strand of literature estimating the carbon Kuznets curve (CKC). The CKC hypothesizes that carbon dioxide emissions initially increase with economic growth but that the relationship is eventually reversed. The recent literature attempts to estimate the CKC by adding energy consumption as a control variable. Due to model misspecifications related to the econometric methodology and database definitions, the results are biased to support the existence of a CKC. Consequently, the literature underestimates the need for climate policies. In the second essay, we study how social networks might help to explain why differences of opinion about climate change persist across segments of the lay public despite the scientific consensus. To do this, we programmed a Facebook application that collected survey data on concerns about climate change and network data on friendships. We found that respondents tend to have friends with similar concerns as their own, the unconcerned respondents have fewer friends, and any two respondents who disagreed about the seriousness of global warming were less than half as likely to be friends. The results indicate that the structure of the social network may hinder changes in opinions, explaining why opinions persist despite the scientific consensus. The results suggest that the communication of climate science could be improved by strategies that aim to overcome these network effects. In the third essay, we study permit markets which are connected by a network of links. A link allows participants of one emissions trading system to use permits of other systems. In a linked network of markets, foreign regulators can influence domestic policy outcomes even without a direct link. We apply graph theory to study these dependencies between markets to determine who exactly can affect domestic emissions and prices. We characterize the equilibrium’s dependency structure assuming perfect competition and an exogenous trading network. The results help to avoid unexpected foreign interference with domestic policy outcomes and to secure the effectiveness of climate change policies.
  • Acemoglu, Daron; Akcigit, Ufuk; Kerr, William R. (2015)
    Bank of Finland Research Discussion Papers 25/2015
    The propagation of macroeconomic shocks through input-output and geographic networks can be a powerful driver of macroeconomic fluctuations. We first exposit that in the presence of Cobb-Douglas production functions and consumer preferences, there is a specific pattern of economic transmission whereby demand-side shocks propagate upstream (to input-supplying industries) and supply-side shocks propagate downstream (to customer industries) and that there is a tight relationship between the direct impact of a shock and the magnitudes of the downstream and the upstream indirect effects. We then investigate the short-run propagation of four different types of industry-level shocks: two demand-side ones (the exogenous component of the variation in industry imports from China and changes in federal spending) and two supply-side ones (TFP shocks and variation in knowledge/ideas coming from foreign patenting). In each case, we find substantial propagation of these shocks through the input-output network, with a pattern broadly consistent with theory. Quantitatively, the network-based propagation is larger than the direct effects of the shocks. We also show quantitatively large effects from the geographic network, capturing the fact that the local propagation of a shock to an industry will fall more heavily on other industries that tend to collocate with it across local markets. Our results suggest that the transmission of various di¤erent types of shocks through economic networks and industry interlinkages could have first-order implications for the macroeconomy.