Walking a tightrope: financial regulation, climate change, and the transition to a low-carbon economy

As with the global financial crisis, there are once again demands on central banks and financial regulators to take on new responsibilities, this time for supporting the transition to a low-carbon economy. Regulators can indeed facilitate the reorientation of financial flows necessary for the transition. But they may find themselves walking a tightrope, having to balance exaggerated expectations against limited capabilities and political economy constraints. Their diagnostic and policy toolkits are still in their infancy. Expanding their legal mandates to take on these new, essentially political, responsibilities should be done through the political process and be accompanied by strengthened governance and accountability arrangements. Taking on these new responsibilities can also have potential pitfalls and unintended consequences on financial markets. Ultimately, central banks and financial regulators cannot deliver a low-carbon economy by themselves and should not risk being caught again in the role of ‘the only game in town’

An analytical model of active inference in the Iterated Prisoner's Dilemma

This paper addresses a mathematically tractable model of the Prisoner's Dilemma using the framework of active inference. In this work, we design pairs of Bayesian agents that are tracking the joint game state of their and their opponent's choices in an Iterated Prisoner's Dilemma game. The specification of the agents' belief architecture in the form of a partially-observed Markov decision process allows careful and rigourous investigation into the dynamics of two-player gameplay, including the derivation of optimal conditions for phase transitions that are required to achieve certain game-theoretic steady states. We show that the critical time points governing the phase transition are linearly related to each other as a function of learning rate and the reward function. We then investigate the patterns that emerge when varying the agents' learning rates, as well as the relationship between the stochastic and deterministic solutions to the two-agent system

Challenges for Systemic Risk Assessment in Low-Income Countries

Assessing and monitoring systemic risk is a challenge for policy makers and supervisors in all countries. It is particularly challenging in low-income countries (LICs), owing to a number of characteristics shared to a greater or lesser extent by most of them. This paper discusses these common characteristics and how they shape the nature of systemic risk in LICs, and concludes with some practical lessons for policy makers and financial supervisors that can help improve the effectiveness of systemic risk assessment and mitigation in these countries

Building an effective financial stability policy framework: lessons from the post-crisis decade

A decade after the global financial crisis, the task of building a financial stability policy framework has unfinished business. Fundamental questions about the goal of financial stability and the policies to achieve it were sidelined by the excessive focus on the minutiae of macroprudential policy. Increased responsibilities were given to central banks without a proper discussion about the right degree of delegation and accountability. A comprehensive framework for financial stability should have three pillars: macroprudential policy, microprudential supervision, and financial safety nets. Sufficient operational independence should be given to the agency(ies) responsible for financial stability but determining the goal, institutional architecture, and agency assignments, resolving any policy tradeoffs, and ensuring accountability should be a political responsibility. Even with the best framework, however, given the variety of structural, behavioral, and political economy factors affecting financial stability and our limited understanding of the financial system, securing this goal will remain a challenge

Spin glass systems as collective active inference

An open question in the study of emergent behaviour in multi-agent Bayesian systems is the relationship, if any, between individual and collective inference. In this paper we explore the correspondence between generative models that exist at two distinct scales, using spin glass models as a sandbox system to investigate this question. We show that the collective dynamics of a specific type of active inference agent is equivalent to sampling from the stationary distribution of a spin glass system. A collective of specifically-designed active inference agents can thus be described as implementing a form of sampling-based inference (namely, from a Boltzmann machine) at the higher level. However, this equivalence is very fragile, breaking upon simple modifications to the generative models of the individual agents or the nature of their interactions. We discuss the implications of this correspondence and its fragility for the study of multiscale systems composed of Bayesian agents.Comment: Accepted for publication: 3rd International Workshop on Active Inferenc

Challenges for Systemic Risk Assessment in Low-Income Countries

Assessing and monitoring systemic risk is a challenge for policy makers and supervisors in all countries. It is particularly challenging in low-income countries (LICs), owing to a number of characteristics shared to a greater or lesser extent by most of them. This paper discusses these common characteristics and how they shape the nature of systemic risk in LICs, and concludes with some practical lessons for policy makers and financial supervisors that can help improve the effectiveness of systemic risk assessment and mitigation in these countries

Mobilizing Finance for the Just Energy Transition in the European Union

Minimizing the adverse social and economic consequences of the energy transition is an important social aspiration. It is the essence of the “just transition,” the connective tissue that binds together climate goals with social outcomes centered around jobs. This policy note proposes the first iteration of a just transition policy framework built around three interrelated and mutually reinforcing pillars. These include: (i) a system for determining a hierarchy of priorities for activities, sectors, or groups that are to be compensated for the negative impacts they suffer from the transition to a low-carbon economy or supported because they contribute directly to a more equitable sharing of the costs and opportunities from the transition; (ii) a fiscal transfer mechanism to allocate public funds consistent with these priorities; and (iii) financial flows enablers, a set of instruments or policy interventions to facilitate private financial flows to activities or projects that are deemed to contribute to a more just transition. The assessment provides seven key takeaways for consideration by competent authorities to strengthen further the EU just transition policy framework going forward. These are: (i) narrowing the scope of the framework by focusing on social support and/or land restoration, while encouraging private sector funding for economic revitalization projects; (ii) enhancing data collection on social impact assessment to better understand the negative effects of climate transition initiatives and prevent "social washing"; (iii) embedding just transition considerations in sustainability regulations by including relevant indicators and metrics; (iv) providing guidance on assessing just transition-related risks for financial firms in prioritized regions and sectors; (v) clarifying supervisory expectations for financial firms regarding just transition-related litigation and liability risk; (vi) encouraging the development of financial instruments for the just transition; and (vii) maximizing the role of multilateral development banks in de-risking just transition projects, especially in member countries with limited resources and capacity

Unemployment in Greece: Evidence from Greek regions using panel unit root tests

The purpose of the paper is to examine the nature of Greek regional unemployment. The paper contributes to the literature assessing the stochastic properties of Greek unemployment rate in the context of the Greek regions by relying on various univariate and panel unit root tests. In particular, recently developed and more powerful panel unit-root tests that control for structural breaks, heterogeneity and cross-sectional dependence in the panel are employed. The results show that in all cases, after taking into account the fact that regional unemployment rates in Greece are subject to a structural break, the null hypothesis of a unit root is not rejected, indicating that the Greek regional unemployment series are non-stationary with the presence of a structural break