Since the birth of the natural rate hypothesis, the conventional notion that short-term output simply fluctuates around a relatively stable long-term trend became the norm in modern macroeconomics, including in the standard New Keynesian DSGE model. However, the global financial crisis (GFC) led to a serious rethinking of this norm, giving rise to the re-emergence of the Blanchard-Summers’ hysteresis debate and a new business cycle paradigm in which the short-term output effects of financial crises permanently feed into long-term growth trends. Using a Bayesian-estimated structural multivariate filtering model calibrated to data for Australia and the United States, the innovation of the paper presented by Augustus in this webinar is the incorporation of climate hysteresis into the estimation of potential output and the output and unemployment gaps. The results suggest non-trivia implications for monetary policy in a carbon-constrained world. Not only are the model-based estimates of potential output and NAIRU more volatile with climate shock persistence, the climate-neutral output and unemployment gap estimates are much smaller than conventional estimates, with different implications for inflation signals during the upturn or downturn of the business cycle. For economies that are more susceptible to disruptive climate shocks, especially in the developing world, an environment in which both demand conditions and the underlying supply potential are rapidly changing will severely complicate the conduct of forward-looking macroeconomic policy.

Augustus Panton is a Ph.D. candidate in economics in the ANU Centre for Applied Macroeconomic Analysis (CAMA) at the Crawford School of Public Policy where his research focuses on the design of optimal monetary policy towards macroeconomic stabilisation in an environment characterised by climatic disruptions and heightened financial stability risks. He is an Adam Smith Fellow at the Mercatus Center, George Mason University in the United States and a Research Student Affiliate with the ARC Centre of Excellence in Population Ageing Research. Prior to joining ANU, Augustus worked as an Economist at the Central Bank of Liberia. Before then, he worked with the Liberian Ministry of Commerce and Industry as an Economist and as Head of the Trade Facilitation Division at the Liberian Ministry of Finance and Development Planning. He has provided consulting services for several international organizations, including the World Trade Organization, the International Trade Centre and the Brookings Institution. Augustus is a multi-award-winning academic. He was awarded ANU’s highest honor for teaching excellence, the Vice-Chancellor’s Award for Excellence in Education in May 2019, having previously won the 2018 Excellence in Teaching (Tutoring Category) Award by the ANU College of Business and Economics and also in the Research School of Economics. He served as Ph.D. Student Representative on the Crawford School’s Higher Degree Research (HDR) Committee in 2018. Augustus is an Associate Lecturer of Economics at the ANU Research School of Economics. His research is widely cited by leading policy institutions, including the Reserve Bank of Australia, the U.S. Federal Reserve, the Brookings Institution, the European Central Bank and the Bank for International Settlements (BIS).