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on Open Economy Macroeconomics |
| By: | Aoki, Kosuke; Auerbach, Alan; Horioka, Charles Yuji; Kashyap, Anil; Watanabe, Tsutomu; Weinstein, David |
| Abstract: | Takatoshi Ito, who passed away in September 2025, was a leading scholar of macroeconomics and international finance. This column, written by a group of friends and colleagues, outlines his many contributions in a lifetime of research, teaching and policy-making in Japan, the United States and around the world. His work is particularly notable for challenging the widespread perception that standard economic analysis is somehow ill- suited for understanding the Japanese economy. Indeed, using the discipline's rigorous tools, he illuminated challenges that Japan faced earlier and more acutely than other countries - including population decline and ageing, ballooning government debt, the zero lower bound and unconventional monetary policies, real estate bubbles and their collapse, and the banking sector's problem of non-performing loans. |
| Keywords: | Asian economies, exchange rate fluctuations, foreign exchange intervention, inflation targeting, international finance, , invoicing currency, Japanese economy, macroeconomics, monetary policy, Takatoshi Ito, zero interest rate policy |
| JEL: | E52 E58 F14 F31 G15 O53 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:agi:wpaper:02000256 |
| By: | Eiji Fujii |
| Abstract: | Countries routinely participate in intergovernmental forums such as the G7, G20, BRICS, and MIKTA. These informal institutions—unlike formal bodies such as the EU and WTO—lack permanent administrative structures, operate through rotating presidencies, and do not issue legally binding commitments. Although often overlooked as drivers of global trade, their formation and evolution embody underlying structural shifts in the world economy. Using data for over 200 countries spanning 1994-2023, this study introduces informal institutions as a distinct determinant of trade within the gravity framework. We find that BRICS exerts trade-facilitating effects comparable to those of formal agreements such as regional trade agreements and WTO accession. This highlights a novel channel of international integration beyond legal commitments. |
| Keywords: | informal institutions, international trade, gravity model, BRICS, MIKTA, G20, G7 |
| JEL: | F10 F13 F14 O19 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12268 |
| By: | J. Scott Davis; Kevin X. D. Huang; Zheng Liu; Mark M. Spiegel |
| Abstract: | We document evidence of a U-shaped relationship between financial development and the adjustments of foreign exchange (FX) reserve holdings in response to a U.S. interest rate increase. Countries with intermediate levels of financial development sell reserves aggressively, while those with low or high development adjust little. Domestic interest rate responses are not systematically related to financial development. A model with borrowing constraints and foreign-currency debt rationalizes these findings: the associated pecuniary externality is maximized at intermediate levels of financial development. Calibrated to match the observed leverage and currency composition, the model reproduces the empirical U-shaped relationship under optimal FX reserve policy, and this relation is robust under a range of conventional interest-rate policy regimes. |
| Keywords: | Foreign reserves; financial development; capital flows; optimal policy. |
| JEL: | F32 F38 E52 |
| Date: | 2025–11–13 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:102100 |
| By: | Régis Barnichon; Aayush Singh |
| Abstract: | In this paper we exploit 150 years of tariff policy in the US and abroad to estimate the short-run effects of tariff shocks on macro aggregates. A careful review of the major changes in US tariff policy since 1870 shows no systematic relation between the state of the cycle and the direction of the tariff changes, as partisan differences on the effects and desirability of tariffs led to opposite policy responses to similar economic conditions. Exploiting this quasi-random nature of tariff variations, we find that a tariff hike raises unemployment (lowers economic activity) and lowers inflation. Using only tariff changes driven by long-run considerations—a traditional narrative identification—gives similar results. We also obtain similar results if we restrict the sample to the modern post World War II period or if we use independent variation from other countries (France and the UK). These findings point towards tariff shocks acting through an aggregate demand channel. |
| Keywords: | tariff; inflation; unemployment; narrative approach; political |
| JEL: | F41 F13 E31 N10 E52 |
| Date: | 2025–11–05 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:102099 |
| By: | Laura Alfaro; Julian Caballero; Bryan Hardy |
| Abstract: | This paper examines optimal foreign currency (FX) hedging by non-financial corporations globally. Using a cross-country, firm-level dataset, we first document key patterns of FX borrowing across advanced (AEs) and emerging market economies (EMEs). We find that while FX debt is prevalent in both groups, its intensity varies considerably. We assess the optimality of firms' exchange rate exposures using a risk-management framework where hedging serves to minimize the impact of cash flow volatility on firm value. Our results indicate that most firms hedge optimally, as exposures from FX debt are largely offset by other exposures, like foreign revenues and assets. While the distribution of exchange rate risk is broadly similar between AE and EME firms, the EME distribution has thicker tails, revealing a larger concentration of firms with significant, unhedged depreciation risk. |
| Keywords: | foreign currency debt, currency risk, currency hedging |
| JEL: | F31 F34 G30 G32 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1303 |
| By: | Hyeongwoo Kim; Shuwei Zhang |
| Abstract: | This paper investigates the design of optimal monetary policy responses to technology shocks in a two-country model framework featuring sticky prices and local currency pricing, where technology shocks propagate internationally. We demonstrate that technology shocks originating in the tradable sector, regardless of their country of origin, elicit monetary policy responses that are symmetric and closely aligned across countries, thereby providing a rationale for a fixed exchange rate regime. In contrast, technology shocks in the nontradable sector generate asymmetric policy reactions and weaken the source country's currency, supporting the case for exchange rate flexibility. In addition, the international transmission of technology shocks amplifies real-sector dynamics through news effects, prompting central banks to adopt contractionary policies, starkly contrasting with the findings of previous literature. |
| Keywords: | Sticky Price; Local Currency Pricing; Exchange Rate Regimes; Technology Diffusion; Interest Rate Rules |
| JEL: | F31 F41 O0 E52 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:abn:wpaper:auwp2025-11 |
| By: | Rodrigo Sekkel; Henry Stern; Xu Zhang |
| Abstract: | We provide novel insights into how foreign and domestic monetary policy communications, beyond rate announcements, affect the financial markets of open economies. We construct a high-frequency dataset that documents the impact of Federal Reserve (Fed) and Bank of Canada (BoC) rate announcements, speeches, press conferences and minutes releases to Canadian financial markets between 1997 and 2023. We find that non-rate announcements are a significant source of domestic monetary policy surprises and international spillovers. Across event types, Fed communications are particularly influential for long-term interest rates and stock futures while BoC communications matter more to short-term interest rates. Since BoC communications have little effect on U.S. interest rates, Canadian announcements have a greater impact on the CAD/USD exchange rate by inducing larger changes in the cross-country interest rate differential. |
| Keywords: | Asset pricing; Central bank research; Exchange rates; Financial markets; Interest rates; International financial markets; Monetary policy |
| JEL: | E52 F31 G15 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:25-33 |
| By: | Luka Dragani\'c; Leonarda Srdeli\'c; Marwil J. Davila-Fernandez |
| Abstract: | Using Croatian data and the IMF's Natural Disaster Debt Dynamic Tool, this paper assesses how public debt adjusts to extreme events in a small open economy. We compare debt paths under baseline and stress scenarios, the latter simulating a major earthquake in 2025. Croatia provides a unique setting for evaluating post-disaster recovery in countries recently incorporated into the European Union. Our benchmark projections, which assume moderate economic growth and a broadly neutral fiscal stance, suggest the debt-to-GDP ratio will gradually decline to below 55% by 2040. In contrast, in the disaster scenario, we document a sharp short-term increase and a persistent upward shift in the debt trajectory, reaching 75% of GDP. Deterministic and stochastic simulations allow us to assess the distribution of potential outcomes. It is shown that, in the absence of shocks, public debt is on a sustainable downward path, but a severe natural disaster could reverse this trend and keep it elevated for years. Our findings highlight the importance of fiscal buffers that are critical for creating space to absorb shocks. The paper innovates by integrating natural disaster stress-testing into public debt analysis, with implications for fiscal risk management and policy planning. While we focus on Croatia, the mechanisms we uncover have broader implications for small open economies exposed to extreme events. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2511.02973 |
| By: | Toshihiko Mukoyama; Kanato Nakakuni; Makoto Nirei |
| Abstract: | This study analyzes the Japanese economy during the Great Recession period (2007-2009). The Japanese GDP dropped significantly during this period, despite limited exposure to the US housing market, and exports also declined sharply. Motivated by this fact, we construct a multi-sector, multi-region small open economy model. Each region has a representative consumer, and regions and sectors are linked through inter-regional input-output tables and consumers’ final demand. We measure the export shocks in each region-sector using trade statistics. Using our model, we quantitatively evaluate how the decline in export demand propagates throughout the country. We find that export shocks account for a significant portion of the GDP decline in many regions. To inspect the mechanism, we conduct counterfactual exercises in which we examine the change in GDP resulting from an export shock in a specific industry-region. The propagation is decomposed within and across regions, as well as within and across sectors. |
| Keywords: | Great Recession, export demand, inter-regional input-output table, multi-sector model |
| JEL: | D57 E32 F41 F44 R15 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_711 |
| By: | Gourinchas, Pierre-Olivier; Ray, Walker; Vayanos, Dimitri |
| Abstract: | We develop a two-country model in which currency and bond markets are populated by different investor clienteles, and segmentation is partly overcome by arbitrageurs with limited capital. Risk premia in our model are time-varying, connected across markets, and consistent with the empirical violations of uncovered interest parity and expectations hypothesis. Through risk premia, large-scale bond purchases lower domestic and foreign bond yields and depreciate the currency, and short-rate cuts lower foreign yields, with smaller effects than bond purchases. Currency returns are disconnected from long-maturity bond returns, and yet the currency market is instrumental in transmitting bond demand shocks across countries. |
| JEL: | E43 E44 E52 F31 G12 G15 |
| Date: | 2025–11–06 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:127783 |
| By: | Malik Curuk; Jérôme Héricourt; Gonzague Vannoorenberghe |
| Abstract: | Estimating the effects of goods and labor market power on firm pricing behavior is difficult since firm-level output and employment are jointly determined. We exploit the variation in the sets of destination countries across exporting firms, which enables us to separately identify the effects of goods and labor market power on pass-through rates by reducing the comovement of firm size across specific sales markets and in its local labor market. We present a theoretical framework in which multi-destination exporters are oligopolists in their goods markets and oligopsonists in their local labor market. Combining firm-level trade data per product-destination with establishment-level balance sheet data and employment zone identifiers for the universe of French firms from 1995 to 2015, we construct theoretically sound proxies for labor and goods market power and jointly estimate their effects on export prices using exchange rate shocks as the source of identifying variation in firm demand. Consistent with the model's predictions, we provide robust evidence that firms with stronger labor market power have a lower pass-through of changes in their effective exchange rate into export prices conditional on their goods market power. The findings indicate a sizable degree of labor market power for French exporters. |
| Keywords: | Labor Market Power;Goods Market Power;Exchange Rate;Pass-through |
| JEL: | F16 F31 J42 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:cii:cepidt:2025-15 |