Climate Change

This paper examines the role of ‘healthy aging’ in boosting labor supply in Korea. First, we use microdata from surveys to assess whether there is evidence that the physical abilities of individuals aged 50 years and above have been improving over successive cohorts. Second, we investigate whether health improvements among older workers influence their labor market outcomes, such as the decision to supply labor or to retire. We use an instrumental variable approach to enable causal inference, proxying exogenous variations in health with the incidence of certain chronic diseases. Our findings reveal that (i) physical health indicators have improved on average across birth cohorts, providing evidence in favor of ‘healthy aging’ in Korea, and (ii) better health increases the probability of participating in the labor force and postponing retirement. Overall, our results suggest that healthy aging has increased the labor supply of older individuals in Korea by around 1.9 percentage points per year during the 2006-20 period. The results for Korea are qualitatively comparable but quantitatively somewhat stronger than those for comparator Asian countries.

This paper examines the macroeconomic effects of credit supply shocks in Mongolia. Using bank credit surveys and a newly constructed indicator of changes in lending standards, adjusted for macroeconomic and bank-specific factors influencing credit demand, we identify the impact of credit supply disruptions on key macroeconomic variables. Our findings reveal that one standard deviation shock to credit supply leads to an initial reduction in total lending growth, output growth, and inflation. Decomposing the shocks into credit supply components we find that shocks to enterprise and household lending also have similar effects on respective lending growth rates. However, household credit supply shocks have a stronger impact on output growth, while enterprise credit supply shocks have a stronger impact on inflation. Variance decomposition analysis suggests that adjusted credit supply shocks purged from demand fluctuations hold significant power in explaining the variability of macroeconomic variables. Overall, our results confirm the importance of credit supply shocks for macroeconomic variables in Mongolia.

Household savings in China are markedly higher than in peer economies, which have been channeled into financing excessive investment. This paper examines the structural and cyclical factors contributing to China’s elevated household savings. The analysis suggests that low government social spending in rural areas and residency (“Hukou”) restrictions in urban areas play a significant role in increasing household savings. In addition, the paper provides evidence that fluctuations in real estate prices significantly impact household savings, both through the wealth effect and the downpayment effect (i.e., need for non-homeowners to save so as to afford downpayments), though the latter channel has weakened after the recent real estate market correction. These findings suggest that further strengthening social safety nets, continuing Hukou reforms, and policies that promote a more efficient transition for the housing market can help reduce household savings and boost private consumption, thus facilitating China’s economic rebalancing.

We investigate the optimal time-consistent use of foreign exchange interventions (FXI) in a small open economy model driven by endowment and portfolio flow shocks, with endogenous FX market depth and a lower bound constraint on FX reserves. In a competitive equilibrium, large capital flows increase conditional exchange rate volatility and make FX markets more shallow. Unlike in the unconstrained case, the central bank's optimal interventions are not solely targeted at offsetting inefficient fluctuations in the UIP premium but also incorporate a forward-looking element due to the risk of depleting reserves. We show that this environment engenders optimal time-consistent FXI policy that is state-dependent. FX sales are more effective than FX purchases, and the policy may respond less or more than one-for-one to capital outflows, depending on their size and the economy's net foreign asset position. Adopting the policy delivers sizable welfare gains, significantly exceeding those from a simple rule directed at stabilizing current capital flows, but only if the initial level of FX reserves is sufficiently far from its effective lower bound.

This report assesses the reliability of Luxembourg’s pension projections and finds that both short- and long-term forecasts generally perform well, supporting sound fiscal planning. Short-term projections have shown modest deviations—on average 0.04 percent of GDP over the past decade—with larger gaps during periods of exceptional uncertainty such as the COVID-19 shock and the inflation surge following Russia’s war in Ukraine. Similar forecasting challenges were observed in peer EU countries. The underestimation of average real contributions per employee has been one key driver of deviations. Long-term projections have remained broadly robust across vintages, with the timing of key pension fund events shifting only marginally. Reserves are still expected to fall below the statutory minimum in the late 2030s and to be exhausted around the mid-2040s. Variability in long-term outcomes mainly reflects evolving demographic and employment assumptions, which tend to have larger effects in small economies. Further improvements—especially refining employment and wage inputs, reassessing return assumptions, incorporating micro-simulations, and enhancing communication—would help to maintain the high level of accuracy and transparency. Proposed model refinements do not alter the fundamental finding that reforms are needed to secure fiscal sustainability of the pension system.

We adopt a data-driven approach to measure trade decoupling over 2015-2023. Countries are classified into three groups according to changes in their data-inferred trade costs with the US and China: those shifting toward the US bloc, those shifting toward the China bloc, and those with no change in alignment. We document that while cross-bloc trade costs rose, they were accompanied by falling within-bloc trade costs, with average trade costs falling marginally in line with global trade resilience. We use a quantitative model to compute the real income effects of this reconfiguration of trade costs. Model simulations suggest that real income in the median country in the world, and the median country within each bloc, rose by 0.4-0.6%. Finally, we find a modest amount of bloc misalignment: the median country would be better off switching blocs. These results suggest that trade decoupling may not follow trade-driven economic interests.