Climate change poses risks to the environment and the economy. This paper examines approaches for incorporating a limited set of physical climate risks into an economic model and estimating their macroeconomic impacts across different climate scenarios. Using a global dynamic general equilibrium model (G-Cubed), the analysis covers the global economy with a particular focus on the United States. These macroeconomic projections associated with climate-related productivity shocks are part of a wider endeavor to understand the climate challenge and the relative merits of potential policy responses. Using estimates from other studies, we first represent climate change effects as productivity shocks and project their general equilibrium effects in G-Cubed. We consider three paths of productivity shocks: two global Shared Socioeconomic Pathways (SSP) scenarios that reduce total factor productivity (TFP), and one US-only scenario that increases productivity in the agricultural sector and lowers labor productivity in other sectors. We also determine the path of the US equity risk premium that produces the same reductions in US GDP that arise in SSP2-4.5 through 2060. Finally, we explore an alternative approach in which the impact of climate change takes the form of a deterioration of the capital stock, which we represent by a reduction in the rate at which physical capital provides capital services in both production and housing. We use the same calibration process as we do with the equity risk premium: we determine the reduction in capital services per unit of physical capital that produces the same impact on US GDP as SSP2-4.5. We find that the macroeconomic impacts of our productivity scenarios in the United States are modest through 2060, reducing US GDP by 0.2% to 0.5% relative to a no-climate-change baseline. Effects on US employment, international trade, and capital flows are also small. Our scenario with sector-specific shocks to labor productivity produces more severe impacts than aggregate shocks to TFP. Outcomes differ significantly across countries: near-term GDP impacts are positive for several regions in the Global North, driven by productivity gains and international capital flows. Also, our results for our alternative scenarios show that by 2060, the GDP impacts in SSP2-4.5 are roughly equivalent to: (1) an increase in the equity risk premium of 1.75 percentage points; or (2) a decrease in capital services per unit of capital of about 1.4 percentage points. In addition, we find that the capital degradation scenario leads to larger welfare losses than the productivity reduction scenarios largely because of its impacts on household capital. Households reduce consumption and increase saving to offset the decline.

The ascent of Asia’s economies is a seminal narrative of modern global development, yet this historic trajectory has reached a critical juncture. The region now stands at the precipice of a new era, defined not by the certainty of convergence but by the complex challenge of securing sustainable, high-income status. While the post-war model—propelled by capital accumulation, export-led growth, and demographic dividends—delivered unprecedented poverty reduction, its momentum is faltering. Widespread productivity slowdowns, rapidly aging populations, and binding environmental constraints present formidable internal headwinds. These are compounded by a shifting global landscape characterized by technological disruption, geopolitical fragmentation, and a reconfiguration of international supply chains. This confluence of internal and external pressures underscores a stark reality: the strategies of the past are necessary but insufficient for the future. Navigating this transition demands a fundamental rethinking of growth paradigms, making the pursuit of innovative and resilient development pathways an urgent imperative for policymakers across the continent. This volume, Navigating Asia’s Path to a High-Income and Sustainable Future, is the product of the Asian Development Bank Institute’s 2024 Annual Conference, which convened leading scholars and practitioners to dissect these very challenges. The book moves beyond a narrow focus on income metrics to provide a holistic examination of the prerequisites for advanced development. Its analysis spans the critical dimensions of this transition—from institutional foundations and technological disruption to demographic shifts, geopolitical risks, and the imperatives of green growth. The contributors provide compelling evidence that urgent action is required to advance this holistic approach, which integrates economic resilience with social inclusivity and environmental sustainability. By assembling this diverse and rigorous body of research, the volume arrives at a central thesis: achieving durable high-income status is an intrinsically multidimensional endeavor. The book argues convincingly that economic policies must be consciously designed to foster social inclusion, build institutional resilience, manage technological change, and safeguard natural capital simultaneously. This integrated perspective is particularly critical for Asia and the Pacific, where the scale of the transformation must be matched by the ambition and coherence of its policy response. For policymakers, academics, and development practitioners, this book serves as an indispensable guide. It provides not only a diagnostic of the intricate challenges at hand but also a forward-looking agenda for crafting the integrated strategies essential for a prosperous, inclusive, and sustainable Asian century.

Growing distrust and strategic rivalry between the US and China have shifted their relationship from mutually beneficial cooperation to costly conflict. The papers in this PIIE Briefing explore ways the two countries can pursue a structured, negotiated approach to economic disengagement while still collaborating on shared goals to address climate change, public health, and demographic challenges. Failure to find ways to cooperate—even while competing—will continue to hurt both economies and the rest of the world and also slow progress on tackling urgent global problems.

This paper explores two scenarios for the potential economic effects of a Middle East war that causes a spike in energy prices. In the first, oil prices surge for one year to around $120 per barrel, while prices also rise sharply for liquefied natural gas, refined petroleum, and fertilizer; in the second, energy prices remain elevated for three years. We find in both scenarios, global growth slows relative to our baseline projection, but the effects are felt very unevenly. Countries dependent on Middle Eastern oil, petroleum, natural gas, and fertilizers experience the largest declines in GDP and increases in inflation. The effects on different sectors vary according to their energy sources, both directly through different energy dependence and indirectly through production networks. Also, trade relationships matter because as the global economy slows, countries such as China experience a decline in export demand, worsening GDP losses, even though China has large domestic supplies of oil, gas, and fertilizer.

President Donald J. Trump's new tariffs could generate trillions of dollars in new federal government revenue over a decade, but the net gain would be reduced by the measures' damaging effects on the US economy and the other economies' likely retaliation. This PIIE Briefing uses a global economic model to assess the effects of US tariff increases of 10, 15, or 20 percentage points on all imported goods. The authors evaluate how the effects would differ depending on whether other economies do or do not retaliate by imposing the same tariffs on imported US goods. --A 15 percentage point increase in universal US tariffs would generate $3.9 trillion in federal government revenue over a decade (2025-34) before accounting for its impact on the US economy and assuming no foreign retaliation. That total would be partially offset by lower tax revenue than otherwise from households and companies due to the tariffs' economic impacts—including slower US growth and lower production, employment, and real wages. After accounting for those offsets, the net revenue gain would be $3.2 trillion over a decade. That net revenue gain would shrink further to $1.5 trillion if other economies retaliate. --A lower 10 percentage point tariff increase, combined with the economic effects and foreign retaliation, would generate a net revenue gain of $1.6 trillion. Higher tariffs do not necessarily yield more revenue. --Of these scenarios, the net gain would be lowest, $791 billion, under a 20 percentage point tariff increase, combined with the economic effects and foreign retaliation. --Under each of these three tariff rate scenarios, the United States would see lower GDP, investment, employment, and real wages over the following decade than otherwise—i.e., than without the tariff increases—and higher inflation over the initial two years. --The US sectors hit hardest would be agriculture, mining, and manufacturing because of their relatively high reliance on foreign demand for their exports. The harm would be amplified by retaliation from trading partners. The Peterson Institute for International Economics has no partisan goal in publishing this research. Our objective is to educate policymakers and the public about the effects these policies would have on Americans and other people around the world.

The United States' granting of permanent normal trade relations (PNTR) status, formerly known as most favored nation status, to China in 2000 resulted in a large expansion of bilateral trade. Concerns over Chinese trade practices and the impact of Chinese exports on US import-competing sectors have contributed to US political discontent and calls for the revocation of PNTR, including by former president Donald Trump in his reelection campaign and in the 2024 Republican Party Platform. The authors find that revoking China's PNTR status would cause higher inflation and a short-term decline in US gross domestic product relative to baseline from which the economy never fully recovers. The loss of output and employment would be felt unevenly across the economy, with agriculture, durable manufacturing, and mining taking the biggest hits. Stock market prices would fall, with agricultural, durable manufacturing, and mining firms absorbing the biggest declines. All of these impacts would be magnified if China retaliates. Ironically, the revocation would damage the US industrial sector and contribute to a wider US trade deficit.

This paper provides quantitative modelling of the effect of three longer-term global transitions: the global demographic transition involving a marked reduction in population growth; a long-term slowdown in productivity growth which may continue, or may conceivably be reversed; and the disruption in the global economy due to increasing climate shocks and the implementation of climate policies that will be needed to reach net-zero emissions by 2050. We study the global investment needs to which these transitions will lead. We demonstrate that these investment needs will be both asymmetric across countries and over time. This asymmetry will lead to potentially large changes in trade flows and significant financial capital flows across national borders, and also to substantial real exchange changes and interest rate movements. The resulting large movements in international capital flows will have significant implications for the global financial system, which we demonstrate at the country and regional level.

The COVID-19 global pandemic has caused significant global economic and social disruption. We use global data on cases and deaths, and public health and economic policy responses to the pandemic, to illustrate the alternative past and potential future trajectories of the pandemic. Shocks to labor and sectoral productivity, consumption, government expenditure, and country and sector risk premia are used within a global multisectoral intertemporal general equilibrium model: G-Cubed, to assess the economic impacts of COVID-19 under those scenarios. We illustrate the vital role of public health responses in managing a pandemic and restoring confidence among economic agents. The role of global coordination amidst a pandemic is also highlighted. We also compare the GDP projections under the alternative scenarios with the actual GDP outcomes in 2020 and 2021. Despite the uncertainties regarding the health outcomes of COVID-19 and the health and economic policy responses to the pandemic, we demonstrate that the actual outcomes lie within those projected for the scenarios.

In an ideal world without uncertainty, policymakers should use a range of policies to reduce greenhouse gas emissions, but the core policy should be to price carbon emissions at the level of the marginal cost of carbon emissions, or equal to the social cost of carbon emissions. However, the real world is highly uncertain. Uncertainty regarding climate science, the economic impact of climate change, and appropriate discount rates across generations all complicate estimates of the social cost of carbon emissions. There are a wide range of estimates ranging from negative numbers to thousands of U.S. dollars per ton of CO2 (Wang et al. 2019), and it is unlikely for policymakers to reach even a vague agreement on the social cost of carbon. There is also a strong argument to go beyond carbon pricing and adopt a mix of policies that lower economic costs and raise the political acceptance of alternative climate policies.

The world will experience dramatic demographic change over this century. This paper examines the impacts of the global demographic change on the Australian economy at both aggregate and sectoral levels in a global multi-region and multi-sector general equilibrium model. Using a detailed structural model, we simulate demographic shocks of six regions in the world economy as well as Australia's own demographic shock to investigate their impacts on Australian macroeconomic conditions, economic structure, and trade patterns. The results suggest that demographic change in different regions of the world economy will have different impacts on sectors in Australia depending on trade patterns between Australia and other regions. The energy, mining and durable manufacturing sectors in Australia are the most affected. Demographic change in China, Japan, and Korea has significant negative impacts on Australia, but partly offsetting these shocks are positive demographic shocks from emerging Asia. the overall impact of the rest of the world on Australian GDP is quantitatively negligible, but the impacts on the real interest rate and trade balances are significant. Global demographic change increases Australian real interest rates in the next two decades on the assumption that emerging countries can access global capital markets and take advantage of their demographic dividends.

This paper updates the analysis of the global macroeconomic consequences of the COVID-19 pandemic in McKibbin and Fernando (2020c) with data as of late October 2020. It also extends the focus to Asian economies and explores four alternative policy interventions coordinated across all economies. The first three policies relate to fiscal policy: an increase in transfers to households of an additional 2% of GDP in 2020; an increase in government spending on goods and services in all economies of 2% of GDP in 2020; an increase in government infrastructure spending in all economies in 2020. The fourth policy is a public health intervention similar to the approach of Australia that successfully manages the virus (flattens the curve) through testing, contact tracing and isolating infected people, coupled with the rapid deployment of an effective vaccine by mid-2021.The policy that is most supportive of a global economic recovery is the successfully implemented public health policy. Each of the fiscal policies assists in the economic recovery with public sector infrastructure having the most short-term stimulus and longer-term growth benefits.

The world has been experiencing dramatic demographic change since the 1950s, with almost all countries facing ageing challenges this coming century. However, the timing and speed of this demographic transition are significantly asymmetric across countries. This paper examines the impacts of global demographic change on macroeconomic conditions, international trade, and capital flows in major economies in a global multi-region and multi-sector general equilibrium model. We separately simulate demographic shocks in six regions of the world economy to understand how each shock individually affects the world economy and then combine these shocks to obtain the consequences of global demographic change. The paper finds that future demographic change will have significant impacts on each region’s GDP, which will change the landscape of the world economy. However, the spillover effects on GDP across countries are relatively small. In young economies such as emerging Asia and Africa, while economic growth will significantly benefit from demographic dividends, demographic change does not improve per capita GDP. In ageing economies such as Japan and Europe, population ageing will decrease the real interest rate. However, this impact will be offset by rising interest rates in young economies. Due to the differential real interest rates, capital will flow from more ageing to less ageing economies. These capital flows can be substantial and beneficial for all economies.

Abstract COVID-19 has disrupted the Chinese economy and is spreading globally. The evolution of the disease and its economic impacts are highly uncertain, making formulation of appropriate macroeconomic policy responses challenging. This paper explores seven plausible scenarios of COVID-19 and the macroeconomic outcomes using a global hybrid DSGE/CGE general equilibrium model. The results demonstrate that even a contained outbreak could significantly impact the global economy in the short run. Economic costs could be significantly avoided with greater investment in public health systems in all economies, particularly in economies where health care systems are less developed and population density is high.

The paper examines climate mitigation strategies to reach net-zero emissions by mid-century, focusing on smoothing macroeconomic costs in the short- to medium-term - the horizon relevant for policymakers. It explores a comprehensive policy package, which complements carbon pricing with an initial green fiscal stimulus, consisting of green public investment and subsidies to renewables production. Model simulations show that thanks to the green public spending, the policy package boosts global output relative to the baseline for the first 15 years of the low-carbon transition. Subsequent transitional output costs resulting from further increases in carbon prices are moderate of the order of 1 percent of baseline global GDP by 2050. The findings suggest that upfront green fiscal packages could help smooth the transition to a low-carbon economy. In the current context of the Covid-19 economic crisis, they would help support the recovery from the crisis and put the global economy on a greener, more sustainable path.

Australia has a history of fragmented and politically contested climate policy, and current climate policy is both piecemeal and limited in scope and ambition. Ample opportunities exist to reduce emissions through the more broad-based application of policy. This paper outlines six areas where climate policy in Australia could achieve emissions reductions at low cost: pricing emissions in industry through a modification and broadening of the existing Safeguards Mechanism; investment in assisting the transformation of the electricity grid to very high shares of renewables; a mixture of innovation support, and targeted incentives and regulatory standards in specific sectors and activities; an effective green infrastructure program to stimulate demand and raise productivity in the medium term; a community focussed structural adjustment fund that would enable disproportionately impacted communities to adapt reality of the global transition to net-zero emissions by 2050; and removing impediments to the emergence of new renewable energy-based export industries to take the place of coal and gas exports.

This paper presents two types of analysis on the interaction between policies to deal with climate change and monetary policies in the euro area. First, we empirically analyze the historical effects of carbon taxes on inflation in the euro area countries to gauge the impact under the current European monetary regime. Second, we explore two alternative monetary policy rules under a range of simulations in a new European version of the G-Cubed multisector model. We study the economic and inflationary impacts of physical climate change shocks (climate risk) and transitions risks arising from carbon taxation within Europe and globally. We find that under the existing monetary policy framework, the inflationary effects of carbon taxes in Euro area countries have been contained. The only significant increase in the HICP (of about 0.8 index points) is found in the first two years. At the same time, however, the impact on core inflation tended to be negative. Thus, carbon taxes mainly affected relative prices rather than the overall price level, which is in line with previous findings for a broader sample of countries. We also find that producers seem to have absorbed a part of the carbon tax since consumer price inflation was lower than producer price inflation.

This study assesses the global economic consequences of climate-related risk in three broad areas: (1) the macroeconomic impacts of physical climate risk due to chronic climate change associated with global temperature increases and climate-related extreme shocks; (2) the macroeconomic effects of climate policies designed to transition to net zero emissions by 2050 (transition risk); and (3) the potential macroeconomic consequences of changes in risk premia in financial markets associated with increasing concern over climate events. We consider four widely used climate scenarios (Representative Concentration Pathways, or RCP), and identify the physical damage functions due to chronic climate risks. The chronic climate risks include sea-level rise, crop yield changes, heat-induced impacts on labor, and increased incidence of diseases. We also estimate the future incidence of climate-related extreme events, including droughts, floods, heat waves, cold waves, storms and wildfires, based on climate variable projections under the climate scenarios. After translating physical climate shocks into economic shocks to labor force and sectoral productivity, we investigate the macroeconomic consequences under the climate scenarios using the G-Cubed model. The results demonstrate that physical climate risk is likely to cause large economic losses in all RCP scenarios, both through chronic climate change and extreme climate shocks. We then explore the impact of country-specific economy-wide carbon taxes as a representative policy action to drive the global economy to achieve net-zero emissions by mid-century. Transition risks vary according to the ambition and the design of policies to reduce emissions. The results demonstrate that there can be potentially significant costs associated with policies to reduce emissions, and the costs differ across sectors and across countries. We also address whether changes in climate risk perceptions can significantly impact the real economy through changes in risk premia in financial markets. We calculate shocks to financial risk premia based on relationships between historical climate shocks and changes in financial market risk premia. We apply these shocks to risk premia under the RCP scenarios and find that the cost of rising risk premia can be of a magnitude consistent with historical experience. The cost appears to be smaller than the economic costs of changes in physical climate risk and transition risk.

Many US policymakers on both sides of the aisle, including President Trump, have called on the US Federal Reserve to cut interest rates to depreciate the US dollar. This paper uses an intertemporal general equilibrium model to explore what would likely happen if this policy was pursued. It shows that the general equilibrium effects of a depreciated real effective exchange rate brought about by lower US interest rates can result in a wide variety of unintended consequences. The paper explores what would happen if US trading partners were to retaliate by devaluing their currencies.