The Unassuming Economist

From a new paper by Ruoyu Chen, Guoqing Wang, Nabiha Jamil, and Najaf Iqbal:

“We exploit the recent inclusion of green bonds to the “Eligible Collateral Assets” (ECAs) for the “Medium-term Loan Facility” (MLF) by the People’s Bank of China (PBOC) as a quasi-natural experiment and analyze its impact on the credit spreads between green and non-green bonds. We use the daily bond market data and employ the difference-in-differences (DID) model for analysis. Adding green bonds to the pool of ECAs by the PBOC significantly reduces the credit spreads (the required return on green bonds was higher earlier). The policy has a more prominent effect on the bonds issued by high-rated and local banks, as well as the ones situated in the Green Finance Reform Innovation Pilot Zones (GFRIPZ). The results of the parallel trend test indicate that the policy effect has a short-term lag, but overall, it shows a trend of continuous enhancement during the sample period.”

From a paper by Sunil Sharma:

“Despite over a decade of reforms, financial systems remain fragile, and with the ongoing degradation of the biosphere addressing these fragilities is becoming even more challenging. The green digital transition requires innovation and experimentation. Laws and rules must support competition for novel technologies and solutions, allow for failure, and facilitate re-allocation of labor, real assets, and capital. Hence, the case for robust banks, nonbank financial intermediaries, and market infrastructure is even more urgent and compelling.

Complexity and deep uncertainty characterize the green digital transition and the operation of economic systems. Taking this seriously means recognizing that simpler heuristic approaches may dominate complicated optimization strategies. We must be cognizant of what we know, what we can know over relevant time horizons, and what may be unknowable.

Given the weaknesses of the current approach to financial regulation and oversight, changes in institutional and financial structure should be considered that would reduce the use of “runnable” short-term debt, create more transparency and better incentives for all players, and hence lessen the need for complicated rules, explicit and implicit State guarantees, and interventions in markets.

In an era of chronic and acute disruptions, durable price and financial stability will require not just accounting for financial hazards, but also engaging in promoting a structural transition. With time running out and the world approaching critical ecological thresholds, central banks and financial regulators will have to integrate environmental considerations into their operations and policies and collaborate more closely with other government agencies.

To increase the systemic resilience of the financial sector, the policy essay argues for:

(i) simplicity in prudential rules; (ii) higher buffers in financial institutions; (iii) greater modularity in the structure of the financial system; (iv) better use of market forces and public discipline; and (v) more credible and effective supervision.”

From a paper by Peter Morgan, Angelica Maddawin, Dina Azhgaliyeva, Wataru Kodama, and Long Q. Trinh:

“Food insecurity has become of increasing concern following the economic downturn during the COVID-19 pandemic and the subsequent sharp rise in inflation, including food price inflation. To better understand the conditions of food insecurity and the impacts of inflation and other drivers of food insecurity in developing Asia, we carried out a household survey in 2023 in seven countries in Southeast Asia and nine countries in the Caucasus and Central Asia. The key results are as follows. First, households that had low income and experienced income declines and/or financial difficulties were more likely to experience food insecurity. Second, households that experienced high inflation, including food price inflation, also tended to have higher food insecurity. Third, among the coping strategies adopted by households, only applying for government aid had a significant effect on reducing food insecurity. Our study contributes to the literature because of both the large number of countries and the large number of variables covered in the analysis. These results highlight the need to develop effective measures to reduce food insecurity among vulnerable groups, which were identified in this study as households with low income, poor financial circumstances and larger family size.”

From a paper by Gail Cohen, Joao Tovar Jalles, Prakash Loungani, and Pietro Pizzuto:

“This paper provides cross-country evidence on the relationship between growth in CO₂ emissions and real GDP growth from 1960 to 2018. The focus is on distinguishing longer-run trends in this relationship from short-run cyclical fluctuations, and on documenting changes in these relationships over time. Using two filtering techniques for separating trend and cycle, we find that long-run trends show evidence of decoupling in richer nations—particularly in European countries—but not yet in developing economies, and that there is stronger evidence of decoupling over the 1990 to 2018 sub-period than over the earlier 1960 to 1989 sub-period. There is also a strong cyclical relationship between emissions and real GDP growth in both advanced and developing economies, and the strength of this relationship has not weakened much over time. The cyclical relationship is largely symmetric: emissions fall about as much during recessions as they rise during booms. The transition to a low-carbon economy will thus require continued progress not only in bringing down trend emissions, particularly in developing economies, but also in taming the increase in emissions that occurs during the boom phase of the business cycle.”

From a paper by Feng Wang and Mengdie Qu:

“Income inequality and energy poverty are critical obstacles to the worldwide low-carbon transformation and deeply affect human behavior. Applying a dynamic panel data model, this study investigates the effect of income inequality and energy poverty on global carbon emissions. We determine the effect of the interaction between income inequality and energy poverty on the global low-carbon transformation based on a panel data set of 193 countries from 1990 to 2019. A one standard deviation decrease in the Gini coefficient causes a 2.98 % decrease in carbon emissions per capita, with the median value of energy poverty. However, in poor countries where the proportion of population with access to electricity is less than 86.0 %, reducing income inequality will increase carbon emissions. The role of energy poverty on carbon emissions per capita is also affected by income inequality. When the Gini coefficient is lower than 0.461, increasing access to electricity will reduce carbon emissions. In contrast, when the Gini coefficient is higher than the critical value of 0.461, increased access to electricity will raise carbon emissions. These findings indicate a new strategy for advancing low-carbon transformation based on the interrelationship between income equality and energy poverty eradication.”