A climate mitigation policy mix of carbon taxes, green subsidies, and infrastructure investment could reduce global balances by a quarter by 2027. But only if countries coordinate their response.
During the pandemic, central banks in both advanced and emerging market economies took unprecedented measures to ease financial conditions and support the economic recovery, including interest-rate cuts and asset purchases.
With fossil fuels likely to remain expensive for some time, governments should let retail prices rise to promote energy conservation while protecting poorer households.
A multifaced response, including increasing interest rates, is needed to prevent an upward spiral of price expectations and rising capital outflows.