The Unassuming Economist

From a paper by Amar Rao, Brian Lucey, and Satish Kumar:

“The functioning of energy markets is essential for global stability and is heavily influenced by geopolitical risks. Understanding these risks is critical for policymakers, market analysts, and nations. This study investigates the impact of geopolitical risks and their components on the futures markets of WTI crude oil and natural gas, utilizing time and frequency connectedness analysis along with impulse response function methods. The analysis is based on a dataset comprising daily prices of spot and futures contracts (across various maturities) as well as treasury yields. Our findings reveal that geopolitical risks have a significant, negative impact on the interest-adjusted spread of WTI crude oil. In contrast, the interest-adjusted spread of natural gas futures (NGF) displays a more complex pattern: while short-term maturities show an insignificant response, long-term maturities exhibit a significant reaction. Spillover effects are more pronounced in the short term but tend to weaken over longer horizons. This study underscores the dynamic influence of geopolitical risks on both key energy markets. Its findings offer a practical framework for risk management, equipping market participants and policymakers with valuable insights to better understand and respond to geopolitical risks in the energy sector.”

From Climate Economics:

“Here are the slides from my recent 25 minute talk. Here is the video where I speak first and then Siqi Zheng speaks about decarbonizing the real estate sector. Here is the entire lecture series.

Six Quick Points

#1 In the developing world, billions of people are moving from rural areas to the cities. Cities offer greater economic opportunity, more excitement and one’s productivity is higher and more robust for urbanites. Farming is more affected by wild weather than is urban life.

#2 People who expect to live their lives in cities invest more in their human capital. Those with more skills are better at solving new problems and are better able to adapt to whatever challenges climate change is posing.

#3 Urbanization raises our income and richer people, cities and nations are better able to adapt to risks. Economic development accelerates adaptation.

#4 Nations with a larger menu of cities to move to will be better able to adapt to climate change. If a nation has one dominant city, then rural to urban migration will cause the mega city to get too big and this will lower quality of life in the slums in that city.

#5 Government investments in place based infrastructure and social insurance often have the unintended consequence of crowding out private self protection investment. That is BAD! Social scientists need to figure out how to design resilience policies such that they are complements not substitutes for private adaptation efforts.

#6 The Lucas Critique; We are not passive victims in the face of climate change. We have an ever growing menu of adaptation strategies that protect us against the serious challenges we now face.”

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.”