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IMF Staff Climate Note-Energy Transition and Geoeconomic Fragmentation: Implications for Climate Scenario Design
November 28, 2023--Summary:
The transition to a low-carbon economy, which is needed to mitigate climate change and meet the Paris Agreement temperature goals, has been affected by the supply chain and energy supply disruptions that originated during the COVID-19 pandemic, the Russian invasion of Ukraine, and the subsequent energy crisis and exacerbation of geopolitical tensions.
These developments, and the broader context of the ongoing "polycrisis," can affect future decarbonization scenarios. This reflects three main factors: (1) pullbacks in climate mitigation policies and increased carbon lock-in in fossil fuel infrastructure and policymaking; (2) the decreasing likelihood of continuous cost reduction in renewable energy technologies; and (3) the likely intensification of macroeconomic shocks amid increasing geoeconomic fragmentation, and the associated policy responses.
In this context, the note assesses the implications of the polycrisis for hypothetical scenarios used to assess climate-related financial risks. Following an analysis of the channels through which these effects are likely to materialize over short- and long-term horizons and some policy implications, the note proposes potential adjustments to the design of the climate scenarios used by financial institutions, central banks, and financial sector supervisors and regulators within their risk management frameworks.
Middle Corridor* through Central Asia, Caucasus Can Boost Trade, Connectivity and Supply Chain Resilience, Says New Report
November 27, 2023-- With the right policies, the Middle Corridor linking Chinese and European markets via Central Asia and the Caucasus can invigorate regional trade and boost connectivity for countries along the route. The corridor can also provide resilience and route diversification for the China-Europe container trade, shielding countries and supply chains from geopolitical shocks, according to a new World Bank report released today.
The Middle Trade and Transport Corridor-Policies and Investments to Triple Freight Volumes and Halve Travel Time by 2030, which focuses on Kazakhstan, Azerbaijan, and Georgia, identifies priority measures that can transform this multimodal rail and maritime corridor into a vital and dependable trade route.
The report notes that with the right investments and policies, the Middle Corridor could triple trade volumes while halving travel time along the route by 2030. This would benefit local and regional economies and broader communities, creating employment opportunities, spurring demand for supporting industries, and attracting businesses.
IMF Working Papers-Monetary Policy Design with Recurrent Climate Shocks
November 24, 2023--Summary:
As climate change intensifies, the frequency and severity of climate-induced disasters are expected to escalate. We develop a New Keynesian Dynamic Stochastic General Equilibrium model to analyze the impact of these events on monetary policy. Our model conceptualizes these disasters as left-tail productivity shocks with a quantified likelihood, leading to a skewed distribution of outcomes.
This creates a significant trade-off for central banks, balancing increased inflation risks against reduced output.
Our results suggest modifying the Taylor rule to give equal weight to responses to both inflation and output growth, indicating a gradual approach to climate exacerbated economic fluctuations.
White-label ETF provider agreement highlights Europe challenges
November 21, 2023--HANetf and Tidal have agreed to collaborate so their respective clients can launch ETFs in the US and Europe
An innovative tie-up between Europe's dominant third-party exchange traded fund platform and a giant of the US market has been heralded as a breakthrough paving the way to greater choice for investors on both sides of the Atlantic.
However, the deal may also signal the difficulty of getting a so-called "white label" ETF business off the ground in a fragmented European market, with its multiplicity of countries, currencies, languages and regulatory regimes.
Central Bank Digital Currency Development Enters the Next Phase
November 20, 2023--Many of the world's monetary authorities are seeking more guidance on how best to pursue digital forms of central bank money
Central bank digital currencies can improve payment systems as well as financial inclusion-if they are appropriately designed. If not, they could pose risks.
While not all countries may see an immediate case to deploy a CBDC, many countries are exploring CBDCs so they will have the option to introduce one in the future if it becomes pertinent for them. Benefits are more likely to come in time, following the policies pursued by countries and the private sector's response, as well as the evolution of technology.
Central Bank Digital Currency Development Enters the Next Phase
November 20, 2023--Many of the world's monetary authorities are seeking more guidance on how best to pursue digital forms of central bank money
Central bank digital currencies can improve payment systems as well as financial inclusion-if they are appropriately designed. If not, they could pose risks.
While not all countries may see an immediate case to deploy a CBDC, many countries are exploring CBDCs so they will have the option to introduce one in the future if it becomes pertinent for them. Benefits are more likely to come in time, following the policies pursued by countries and the private sector's response, as well as the evolution of technology.
Is FinTech Eating the Bank's Lunch?
November 17, 2023--This paper examines how the growing presence of FinTech firms affects the performance of traditional financial institutions. The findings point to a negative impact on profitability, primarily due to a reduction in interest income and a rise in operational costs.
Although established financial institutions have tried to diversify their revenue streams, these efforts have proven inadequate to offset the losses associated with increased competition from FinTech firms.
Our study also reveals that various FinTech business models, such as Peer-to-Peer (P2P) lending and Balance Sheet lending, have varying effects on financial institutions. Cooperative banks experience more significant profit deterioration under both models, whereas (larger) commercial banks appear to benefit from partnerships with P2P platforms, as evidenced by an increase in non-interest income. Furthermore, the findings suggest that FinTech presence has a disproportionately larger adverse effect on banks in countries with more competitive, profitable, and developed financial systems. Interestingly, however, traditional financial institutions in countries with stronger regulatory frameworks appear to benefit from the expanding influence of FinTech firms.
Report finds strong expansion of global value chains but warns of increased vulnerability
November 16, 2023--Global value chains (GVCs) continued to expand in 2022, as indicated by the growing share of foreign inputs in exports and the increasing participation rates of economies worldwide. This bodes well for spreading the benefits of trade to more firms, workers and developing economies, according to the GVC Development Report 2023 issued on 16 November.
However, the report also flags increasing risks from the dependence on a small number of economies for certain products and highlights the vulnerability of GVCs to rising trade tensions and global crises.
Climate Change is Disrupting Global Trade
November 15, 2023--Panama's drought shows how trade disruptions from climate extremes can reverberate around the world
Around 1,000 ships pass through the Panama Canal each month carrying a total of over 40 million tons of goods-about 5 percent of global maritime trade volumes.
But water levels in this vital link between the Atlantic and Pacific oceans have fallen to critical lows because of the worst drought in the canal’s 143-year history.
Drought restrictions imposed amid insufficient rainfall at the Gatun Lake, which feeds the canal, have reduced throughput by some 15 million tons so far this year. Ships have faced an additional six days in transit. The authorities are exploring strategic options to boost the water supply in the canal.
As the Chart of the Week shows, ports in Panama, Nicaragua, Ecuador, Peru, El Salvador and Jamaica are suffering most from these delays, with 10 percent to 25 percent of their total maritime trade flows affected.
Investors miss out on sugar rush as they flee commodities ETFs
November 13, 2023--WisdomTree's director of macroeconomic research, Aneeka Gupta, acknowledged that investors seemed to have lost out on the rise in the price of sugar and may not buy back in.
Energy ETFs have been a recent bright spot while funds for precious metals like gold have suffered outflows, according to data provided by Invesco.
When it comes to sugar-specific investment vehicles, investors do not appear to have chased performance over the second half of the year, despite prices that rose beyond spring's highs.