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 »
Questions from California’s battle over carbon emissions
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.  California followed through on this promise, filing a lawsuit with 16 other states in May.  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.”  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.
By Kyla Fisher, M.A. Economics, Queen’s University
Innovation is one of the primary drivers of economic growth and improvements in living standards. It often produces larger social benefits than private benefits, leading firms to under-invest in R&D compared to the socially-optimal level. One of the ways that the government works to overcome this gap is through offering intellectual property (IP) protections, giving firms a temporary monopoly on commercializing their ideas. In addition, many governments allocate significant funds directly towards research through public research institutions or universities. However, it is difficult to determine the impact of these public efforts to stimulate innovation as we are unable to know the counterfactual. This article reviews the findings from an innovative study by Heidi Williams (2013) on the use of IP during the sequencing of the human genome. The study exploits the discrete nature of gene sequencing and the fact that it was researched both publicly and privately to evaluate the impact of IP on innovation outcomes. Despite the importance of IP policy for technological innovation there are relatively few empirical studies in this area. For this reason, Williams’ study generated quite a bit of interest at the time of publication and has been cited in multiple U.S. Supreme Court briefings.
By Peter Shannon, M.A. Economics, Queen’s University
Ontario’s 2018 budget was released March 28, projecting an unanticipated deficit of $6.7 billion for the 2018-19 fiscal year. The 2017 budget projected that Ontario was on track for consecutive balanced budgets and indeed, Ontario ended a 10 year string of deficits with a $642 million surplus in 2016-17.  Given the province’s rapid growth and low unemployment in recent years, tighter fiscal policy seemed imminent. However, pre-election promises of free childcare, expanded prescription drug coverage and increased health care spending will push Ontario back into red ink this year. 
The political motivations of Ontario’s 2018 budget are clear: with the June 7 election looming, Premier Wynne’s Liberals are attempting to replicate the success of their federal counterparts. Like Justin Trudeau in 2015, the Ontario Liberals are promising to run a series of deficits to expand social programs, with an emphasis on families with young children, seniors, and mental health.  Both governments display a shift in focus from net debt levels to debt-to-GDP ratios as a measure of sustainability.
In 2015, according to Statistics Canada, there were 72,039 police reported impaired driving incidents and 122 of those leading to death. Further, MADD Canada reports that on average, four people are killed daily by alcohol-related or drug-related traffic collisions. It is, therefore, no surprise that the concern regarding impaired driving is a subject that has continued to bring a range of heartaches and considerable debate. As it has been and remains one of the leading causes of death in Canada, there has been a great deal of research conducted, policies proposed, and laws implemented in the attempt to reduce the fatal collisions arising from impaired driving.
Under the Criminal Code of Canada, an individual is considered impaired and is subject to criminal charges if they drive while having consumed an amount of alcohol in which their blood alcohol concentration (BAC) level exceeds the legal limit of 80 milligrams per 100 milliliters of blood. In addition to the per se legal limit set by the Criminal Code of Canada, different provinces have also implemented warn ranges, in which penalties and sanctions may be applied even if an individual is driving below the 0.08 legal limit. One of the more recent laws that has been adopted by most Canadian provinces aimed to deter drunk driving are longer license suspensions that offenders face if found driving with BAC levels between 0.05 and 0.08. Specifically, license suspensions have recently increased for first-time offenders past the initial 24-hour period to a minimum of 3 days, and even longer in certain jurisdictions.Read More »
Monetary policy may focus on price level targeting (PLT) or inflation targeting (IT). The distinction between the two frameworks is that under IT, the central bank does not respond to temporary deviation of prices from trend. Bygones are bygones. In contrast, with PLT, past inflation performance matters and past deviations must be undone to restore the price level to the target path.Read More »
Eric Richert summarizes his essay, “Estimating an Effort Coordination Game Between Parents and Their Children,” which was a co-winner of the 2016 Scarthingmoor Prize for best MA essay in economics. Eric is currently a PhD student in the Queen’s Economics Department.
By Eric Richert, Queen’s University
Student learning typically requires effort provision by parents, teachers, and students. However, the early education literature all too often ignores student effort focusing only on the effort of parents and teachers. The effort decision of the child is often excluded from the optimization problem that is solved by the parent, or is a decision made by the parent. The traditional model strangely ignores the child’s decisions. This assumption may make sense in early childhood but is less believable as students move into high school and beyond, where they are able to make their own decisions.
In my research, I examine the effects of allowing children to make their own decisions regarding the amount of effort they put into their studies.
By Andrea Craig, JDI Student Fellow, Queen’s University
Housing prices, housing affordability, and the impact of offshore money on residential real estate in Vancouver are not new topics. However, policies to address these issues are new. Beginning last August, foreign purchases of residential real estate in Metro Vancouver are subject to an additional 15 percent property transfer tax. In addition, last month, the provincial government announced repayable down-payment assistance for first-time homebuyers in B.C.
As consumers we associate higher tax rates with higher prices. In the usual case of a tax imposed on all consumers, this is correct. However, in the case of the foreign property transfer tax, prices will decrease (or appreciate less). Here is a stylized analysis showing how the foreign property transfer tax decreases housing prices.Read More »
In 1980, Canadian men with a bachelor’s degree earned approximately 32% more than those with a high school degree. For women, the equivalent figure was 44%. By 2005 the university to high school wage premium had increased to about 41% for men and 51% for women (see Figure 1). The rise in the wage premium over this time period shows just how important post-secondary education has become at an individual level.
Wage gap for men. Figure from Boudarbat, Lemieux, and Riddell (2010).
Wage gap for women. Figure from Boudarbat, Lemieux, and Riddell (2010).
By Wenbo Zhu, JDI Student Fellow, Queen’s University
Some technological advancements are skill-complementing, meaning that they tend to increase the productivity and demand for skilled workers. Other technological advancements are skill-replacing, meaning that they tend to reduce the demand for skilled workers and raise the productivity and demand for unskilled workers. Electronic computers are typically considered a prime example of skill-complementing technologies, whereas assembly lines and the use of interchangeable parts in the manufacturing industry are classic examples of skill-replacing technologies.
Disentangling the impacts of each type of technology is important for understanding of the impact of technological changes on labor markets. Read More »