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This edition was written by Elijah Asdourian, Alex Conner, Georgia Nabors, and Louise Sheiner.
Many countries, as well as a handful of U.S. states, have pledged to stop using coal by 2030 in order to fight climate change. Stephen Holland of the University of North Carolina, Greensboro and co-authors find that natural gas could supplant between 66% and 94% of coal production in the U.S. and still meet current electricity demand. They build a model where natural gas is used to meet demand even if coal has a lower private marginal cost. The authors find that replacing most coal with natural gas would cost between $49 to $92 per ton but reduce total U.S. energy-related emissions by 5% to 8%, making it likely to pass a benefit-cost test from CO2 emissions alone, even without considering the benefits of reducing local pollutants.
Linda S. Goldberg and Oliver Hannaoui of the Federal Reserve Bank of New York find that the decline in the U.S. dollar share of global reserves from 2015 to 2021, which currently stands at 60%, is largely explained by shifts in a small group of countries with a lower-than-average dollar share and growing reserve holdings, not a broader shift in preferences away from the dollar. The largest contribution came from Switzerland, which has accumulated large euro reserves in its effort to limit the appreciation of the franc. The authors argue that foreign central banks with reserves that exceed their liquidity and transaction needs are more willing to shift into nontraditional currencies, such as the renminbi, when the interest rates on those currencies are significantly higher than rates on reserve currencies, especially when a nation is less aligned with the U.S. “The broader message is that large portfolio size changes upward or downward by countries with different portfolio allocations than the average across countries will tend to tilt global aggregates of the dollar share of reserve portfolios,” the authors write. “This is a basic mechanical result, rather than a shift in preferences around holding US dollar assets.”
Using novel data from 115 countries from 1940 to 2014, Victoria Ivashina of Harvard and co-authors find that changes in corporate debt can help predict economic fluctuations, financial crises, and the speed of economic recoveries. They find that an expansion in corporate debt significantly increases the likelihood of a financial crisis. Further, increases in corporate debt predict crises as well as increases in household debt, which economists have focused on as a key indicator of financial distress. Large disparities in firm credit growth across sectors also increases the probability of a crisis, and an expansion in lending to non-financial corporations is associated with a slower economic recovery in the wake of a crisis. The authors conclude that economists and regulators should be more attentive to corporate debt when evaluating recession risks.
"The risks to economic growth remain tilted to the downside. Growth could be lower if the effects of monetary policy turn out stronger than expected. A weaker world economy or a further slowdown in global trade would also weigh on euro area growth. Russia's unjustified war against Ukraine and the tragic conflict in the Middle East are major sources of geopolitical risk. This may result in firms and households becoming less confident about the future and global trade being disrupted. Growth could be higher if inflation comes down more quickly than expected and rising real incomes mean that spending increases by more than anticipated, or if the world economy grows more strongly than expected," says Christine Lagarde, President of the European Central Bank.
"Upside risks to inflation include the heightened geopolitical tensions, especially in the Middle East, which could push energy prices and freight costs higher in the near term and disrupt global trade. Inflation could also turn out higher than anticipated if wages increase by more than expected or profit margins prove more resilient. By contrast, inflation may surprise on the downside if monetary policy dampens demand more than expected, or if the economic environment in the rest of the world worsens unexpectedly."
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