Hutchins Roundup: Climate change, impact of dollar disruptions, and more
Studies in this week’s Hutchins Roundup find that climate change will reduce global output per capita, non-U.S. banks remain vulnerable to dollar disruptions and more.
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Climate change has long-term macroeconomic effects
Using data for 174 countries from 1960 to 2014, Matthew Kahn of John Hopkins University and coauthors find that climate change—specifically, deviations of temperature above or below historic norms—adversely affects long-term economic growth. Their model suggests that an increase in the average global temperature of 0.04 degree Celsius per year will reduce global output per capita by over 7 percent by 2100. Because economic growth is affected not only by higher temperatures but also by climate variability, climate change affects all countries, not just those that are low-income or hot. Limiting temperature increases to 0.01 degree Celsius per year, as specified by the Paris Climate Agreement, reduces the output loss in 2100 to just 1 percent, they find.
Global non-U.S banks remain vulnerable to dollar disruptions
In its recently released Global Financial Stability Report, the IMF finds that non-US banks are vulnerable to changes in the cost of U.S. dollar funding, which was a major source of stress during the global financial crisis. Using a sample of 26 advanced economies and emerging markets, they find that the cross-currency funding gap— the difference between dollar-denominated assets and liabilities — has widened from $1 trillion (10 percent of assets) in 2008 to $1.4 trillion (13 percent of assets). This gap must be filled by foreign currency swaps or other instruments, making banks more vulnerable. The IMF finds that the banks do have more highly liquid dollar assets, which can be sold quickly in times of stress. Despite this, the authors find that higher costs of dollar funding increase the probability of banking sector defaults in economies of countries that are home to non-U.S. banks and can spillover to a cutback in loans to emerging markets that borrow U.S. dollars. The authors advise that larger capital buffers, stronger liquidity, and higher profitability could mitigate the financial stability risks posed by an increase in dollar funding costs or a shortage of dollar funding.
Rising Chinese imports curtail U.S. innovation
David Autor of MIT and coauthors find that foreign competition hampers domestic innovation. Using data from patents filed between 1975 and 2013, they find that U.S. firms facing intensified competitive pressure from Chinese imports reduced research and development expenditures and obtained fewer patents. The effect was larger among initially less profitable and capital-intensive firms, they say. The authors note that their research only captures the direct effects of competition on innovation; if competition thins out weaker firms and encourages robust new innovators, competition could also have some positive effects on innovation.
Chart of the week: Estimated world output growth in 2019 would be lowest since global financial crisis
Source: Wall Street Journal
“[T]here are several downside risks to growth. Heightened trade and geopolitical tensions, including Brexit related risks, could further disrupt economic activity and derail an already fragile recovery in emerging markets and the euro area. This could lead to an abrupt shift in risk sentiment, financial disruptions, and a reversal in capital flows to emerging markets. In advanced economies, low inflation could become entrenched and constrain monetary policy space further into the future, limiting its effectiveness. To rejuvenate growth, policymakers must undo the trade barriers put in place with durable agreements, rein in geopolitical tensions, and reduce domestic policy uncertainty. Such actions can help boost confidence and reinvigorate investment, manufacturing, and global trade. In this regard, we look forward to more details on the recent tentative deal reached between China and the United States. We welcome any steps to deescalate tensions and to roll back recent trade measures, particularly if they can provide a path towards a comprehensive and lasting deal,” says Gita Gopinath, Chief Economist at the IMF
“To fend off other risks to growth and to raise potential output, economic policy should support activity in a more balanced manner. Monetary policy cannot be the only game in town. It should be coupled with fiscal support, where fiscal space is available and fiscal policy is already not too expansionary. Countries like Germany and the Netherlands should take advantage of low borrowing rates to invest in social and infrastructure capital, even from a pure cost benefit analysis. If growth were to deteriorate more severely, an internationally coordinated fiscal response, tailored to country specific circumstances, may be required.”