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Mr. Paul S. Mills

Commodity Boom: How Long Will It Last?" asks how economies will fare after the record-high prices of key raw materials posted in recent months, which build on dramatic increases from their lows of 2000. The lead article warns that the impact on headline inflation levels might persist throughout 2008, even without further commodity price hikes. It urges policymakers to ensure efficient functioning of market forces at the global level, and to move swiftly to protect the poorest. Another article addresses the effects of climate change on agriculture, warning that farm production will fall dramatically-especially in developing countries-if steps are not taken to curb carbon emissions. Other articles on this theme argue that policies to reduce greenhouse gas emissions need not hobble economies, and that financial markets can help address climate change. "People in Economics" profiles John Taylor; "Picture This" says the global energy system is on an increasingly unsustainable path; "Country Focus" spotlights South Africa; and "Straight Talk" examines early warnings provided by credit derivatives. Also in this issue, articles examine China's increasing economic engagement with Africa, and the outsourcing of service jobs to other countries.

Mr. Eduardo Borensztein, Mr. Olivier D Jeanne, Mr. Paolo Mauro, Mr. Jeromin Zettelmeyer, and Mr. Marcos d Chamon

Abstract

The way countries structure their public borrowing has long been considered an important determinant of economic performance. This topic has recently received renewed attention as a result of not only steep increases in public debt levels in emerging market countries—and a number of highly visible and damaging crises—but also pronounced changes in the composition of those debts.1 There is increasing recognition that debt structure has important implications for both the frequency of crises and the disruption they cause when they strike.2 Indeed, the official sector is beginning to give renewed prominence to the possible need for innovations in the design of countries’ financial liabilities.3

Mr. Eduardo Borensztein, Mr. Olivier D Jeanne, Mr. Paolo Mauro, Mr. Jeromin Zettelmeyer, and Mr. Marcos d Chamon

Abstract

Public debt in emerging market countries differs in several respects from that in advanced economies. First, average debt levels were traditionally equivalent to a lower share of GDP in emerging market countries than they were in advanced economies; the gap has closed in recent years, partly as a result of reductions in the debt of advanced economies (Figure 1). Second, reliance on externally issued debt has been far greater in emerging market countries than in advanced economies. Third, while the structure of external debt of emerging market countries is similar to that of advanced economies, the structure of their domestic debt—in terms of maturity, currency composition, and the prevalence of indexed debt—is very different.1

Mr. Eduardo Borensztein, Mr. Olivier D Jeanne, Mr. Paolo Mauro, Mr. Jeromin Zettelmeyer, and Mr. Marcos d Chamon

Abstract

Existing debt structures in emerging market countries seem to rely excessively on risky forms of debt—such as short-term and foreign-currency debt—which may amplify the economic cycle, increase the likelihood of crises, and make crises more difficult to manage. Increases in risky forms of debt may be the result of worsening debt sustainability, but they also reinforce the rise in vulnerability.

Stefan Mittnik, Willi Semmler, and Alexander Haider
Recent research in financial economics has shown that rare large disasters have the potential to disrupt financial sectors via the destruction of capital stocks and jumps in risk premia. These disruptions often entail negative feedback e?ects on the macroecon-omy. Research on disaster risks has also actively been pursued in the macroeconomic models of climate change. Our paper uses insights from the former work to study disaster risks in the macroeconomics of climate change and to spell out policy needs. Empirically the link between carbon dioxide emission and the frequency of climate re-lated disaster is investigated using cross-sectional and panel data. The modeling part then uses a multi-phase dynamic macro model to explore this causal nexus and the e?ects of rare large disasters resulting in capital losses and rising risk premia. Our proposed multi-phase dynamic model, incorporating climate-related disaster shocks and their aftermath as one phase, is suitable for studying mitigation and adaptation policies.
Mr. Eduardo Borensztein, Mr. Olivier D Jeanne, Mr. Paolo Mauro, Mr. Jeromin Zettelmeyer, and Mr. Marcos d Chamon

Abstract

As described in Section II, the absence of explicit seniority is a striking difference between sovereign and corporate debt. This section argues that explicit seniority in sovereign debt—and, more generally, contractual innovations that help protect creditors from the consequences of future additional borrowing by the debtor country—could potentially play a useful role by promoting safer debt structures, discouraging overborrowing, and lowering interest costs for countries with moderate debt levels. However, this section is only a first pass at the issue, and a more thorough analysis of its consequences in different situations as well as its practical feasibility and impact on crisis resolution is warranted.1

Afsaneh Beschloss and Mina Mashayekhi

GREEN BONDS, LAUNCHED by the World Bank and the European Investment Bank more than a decade ago, blazed a trail for investments that could eventually reach into trillions of dollars in climate-related projects, including renewable energy, energy efficiency, and ecosystem protection and restoration.

Mr. Eduardo Borensztein, Mr. Olivier D Jeanne, Mr. Paolo Mauro, Mr. Jeromin Zettelmeyer, and Mr. Marcos d Chamon

Abstract

The debate on government debt in the context of possible reforms of the international financial architecture has thus far focused on crisis resolution. This paper seeks to broaden this debate. It asks how government debt could be structured to pursue other objectives, including crisis prevention, international risk-sharing, and facilitating the adjustment of fiscal variables to changes in domestic economic conditions. To that end, the paper considers recently developed analytical approaches to improving sovereign debt structure using existing instruments, and reviews a number of proposals--including the introduction of explicit seniority and GDP-linked instruments--in the sovereign context.

Charles Cohen, S. M. Ali Abbas, Myrvin Anthony, Tom Best, Mr. Peter Breuer, Hui Miao, Ms. Alla Myrvoda, and Eriko Togo
The COVID-19 crisis may lead to a series of costly and inefficient sovereign debt restructurings. Any such restructurings will likely take place during a period of great economic uncertainty, which may lead to protracted negotiations between creditors and debtors over recovery values, and potentially even relapses into default post-restructuring. State-contingent debt instruments (SCDIs) could play an important role in improving the outcomes of these restructurings.