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on Open Economy Macroeconomics |
| By: | Joshua Aizenman; Hiro Ito; Donghyun Park; Jamel Saadaoui; Gazi Salah Uddin |
| Abstract: | The Global Financial Crisis and the COVID-19 pandemic were two major shocks to the world economy in the 21st century. In this study, we analyze the patterns of recessions and recoveries of 101 advanced and developing economies. We identify the turning points of recessions and expansions between 1990 and 2022, and perform cross-country analysis of domestic and external drivers of economic recovery. In addition to the standard independent variables, we include institutional development, political stability, the extent of democracy, and trade restrictions indexes, and explore their roles in explaining recessions and recovery patterns. For the whole sample, we find that deeper recessions are followed by stronger recoveries, in line with Friedman’s plucking model of the business cycle. However, the empirical evidence for the plucking model becomes weaker if institutional development is limited and trade restrictions are high. We show that recessions that create conflict and trade tensions differ sharply from those that do not, a highly relevant finding in the current global climate of heightened trade tensions and geopolitical uncertainty. Finally, since developing countries tend to have weaker institutions and higher trade barriers, our evidence suggests that if policy-makers seek to cushion global shocks, they will need to rely on countercyclical monetary and fiscal policy. Implementation of such policies is generally facilitated by robust and credible monetary and fiscal policy frameworks. |
| JEL: | E62 E63 E65 F32 F41 F43 F45 G01 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33757 |
| By: | Uraku Yoshimoto; Kiyotaka Sato; Takatoshi Ito; Junko Shimizu; Yushi Yoshida; Taiyo Yoshimi |
| Abstract: | While Japanese exports are generally considered invoiced mainly in U.S. dollars (USD), this study presents contrary evidence that most Japanese firms choose yen-invoiced exports. Surprisingly, only the top one percent of firms in size tend to choose USD-invoiced exports, based on the Japan Customs export declaration data that was newly made available to researchers. By conducting fixed-effect panel estimation using the granular Japan Customs transaction data, combined with the most comprehensive firm-level data compiled by the Ministry of Economy, Trade and Industry (METI), we demonstrate that the firm size and the intra-firm export share significantly reduce yen-invoiced exports. Smaller firms with few overseas subsidiaries tend to choose yen-invoiced exports to avoid foreign exchange risk. In contrast, larger firms efficiently manage foreign exchange risk arising from USD-invoiced exports, since they tend to export to overseas subsidiaries and benefit from operational hedging that offsets USD-denominated import payments with export revenues within group companies. Smaller firms would continue to choose yen-invoice exports unless they can benefit from operational hedging. |
| JEL: | F30 F31 F37 F41 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33748 |
| By: | Ajovalasit, Samantha; Consiglio, Andrea; Pagliardi, Giovanni; Zenios, Stauros Andrea |
| Abstract: | Political risk is a significant determinant of sovereign debt dynamics. We estimate the sensitivity of bond yields and economic growth to a country-level broad proxy of political risk and develop a stochastic debt sustainability analysis optimization model with both yields and growth channels to show that political risk can render debt unsustainable, triggered by changes in the political rating level, volatility, or both. In contrast, existing models that neglect political risk would incorrectly predict sustainability. Importantly, we uncover political risk effects in developed countries, going beyond the emerging markets of earlier literature. We establish a positive predictive relation of structural reforms to political ratings, and benchmark reforms against a large-scale quantitative easing program and find them comparably effective, highlighting their significance in restoring debt sustainability. We also establish the effect of political risk on the optimal choice of debt financing maturities. We validate the model out-of-sample on the Italian 2014-2019 reforms, showing that it would have predicted the country's debt more accurately than existing models. Likewise, a simulation of the French 2024 snap elections finds a much higher risk of debt unsustainability than that estimated if the political shock is omitted. |
| Keywords: | Debt management, debt sustainability, political risk, structural reforms |
| JEL: | E52 E62 F30 F34 G15 G18 H62 H63 H68 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:eabhps:317786 |
| By: | Nicolas de Roux; Laurent Ferrara |
| Abstract: | Officially, the U.S. Federal Reserve has a statutory dual domestic mandate of price stability and full employment, but, in this paper, we question the role of the international environment in shaping Fed monetary policy decisions. In this respect, we use minutes of the Federal Open Market Committee (FOMC) and construct indexes of the attention paid by U.S. monetary policymakers to the international economic and financial situation. These indexes are built by applying natural language processing (NLP) techniques ranging from word count to built-from-scratch machine learning models, to OpenAI's GPT models. By integrating those text-based indicators into a Taylor rule, we derive various quantitative measures of the external influences on Fed decisions. Our results show that when there is a focus on international topics within the FOMC, the Fed’s monetary policy generally tends to be more accommodative than expected by a standard Taylor rule. This result is robust to various alternatives that includes a time-varying neutral interest rate or a shadow central bank interest rate. |
| Keywords: | Monetary policy, Federal Reserve, FOMC minutes, International environment, Natural Language Processing, Machine Learning |
| JEL: | E52 F42 C54 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:drm:wpaper:2025-23 |
| By: | Laura Alfaro; Mariya Brussevich; Camelia Minoiu; Andrea F. Presbitero |
| Abstract: | Finding new international suppliers is costly, so most importers source inputs from a single country. We examine the role of banks in mitigating trade search costs during the 2018–2019 U.S.-China trade tensions. We match data on shipments to U.S. ports with the U.S. credit register to analyze trade and bank credit relationships at the bank-firm level. We show that importers of tariff-hit products from China were more likely to exit relationships with Chinese suppliers and to find new suppliers in other Asian countries. To finance their geographic diversification, tariff-hit firms increased credit demand, drawing on bank credit lines and taking out loans at higher rates. Banks offering specialized trade finance services to Asian markets eased both financial and information frictions. Tariff-hit firms with specialized banks borrowed at lower rates and were 15 pps more likely and 3 months faster to establish new supplier relationships than firms with other banks. We estimate the cost of searching for suppliers at $1.9 million (or 5% of annual sales revenue) for the average U.S. importer. |
| JEL: | F34 F42 G21 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33754 |
| By: | Akira Ishide (The University of Tokyo) |
| Abstract: | Aggregate production and total factor productivity (TFP) fall dramatically during sudden stop episodes. During these episodes, domestic demand contracts, while foreign demand remains largely stable, and exchange rate depreciation favors exporters. This shift leads to a relative expansion of export-oriented activities over domestic-oriented activities. Due to a combination of differences in market power and tax treatment, export-oriented activities exhibit lower revenue-based TFP (TFPR) than domestic-oriented activities. Consequently, the reallocation of resources toward export-oriented activities reduces aggregate TFP. Leveraging detailed microdata from Mexico, I provide new empirical evidence demonstrating the difference in distortions and reallocations of resources at the plant–product–destination level during the 1994 sudden stop. I then build a multisector small open economy new Keynesian model and show that reallocation effects explain about 50% of the observed decline in value added in the manufacturing sector. |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:cfi:fseres:cf602 |
| By: | Nuwat Nookhwun; Jettawat Pattararangrong; Phurichai Rungcharoenkitkul |
| Abstract: | Under dominant currency pricing, exchange rate swings affect firms' profits in domestic currency rather than price competitiveness. We quantify these valuation effects by constructing firm-specific exchange rates that reflect invoicing currencies and capture cash-flow exposures. These net-invoice-currency-weighted exchange rates (NICER) outperform trade-weighted exchange rates in explaining firm profitability, particularly for smaller exporters. Higher trade dependency amplifies NICER sensitivities, while financial hedging only partially mitigates them. NICER fluctuations also impact firm liquidity and credit conditions, with large exporters offsetting liquidity shocks through external financing. These cash-flow effects, in turn, drive exporters' investment and employment decisions. |
| Keywords: | exchange rates, valuation effects, dominant currency paradigm, firm-level data, firm profitability, invoicing currency, exports, financial hedging |
| JEL: | E44 F31 F41 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1266 |
| By: | Huixin Bi; Andrew Foerster; Nora Traum |
| Abstract: | Using a two-country monetary union framework with financial frictions, we quantify the efficacy of targeted asset purchases, as well as expectations of such programs, in the presence of sovereign default and financial liquidity risks. The risk of default increases with the level of government debt and shifts in investors’ perception of fiscal solvency. Liquidity risks increase when the probability of default affects the tightness of credit markets. We calibrate the model to Italy during the 2012 European debt crisis and compare it to key features of the data. We find that changes in investors’ perception played a more significant role than increases in government debt in affecting the macroeconomy. When a debt crisis occurs, asset purchases help stabilize both financial markets and the economy. This stabilization effect can occur even if asset purchases are expected but never implemented. Moreover, expectations of potential asset purchases during a crisis alter the level of economic activity in periods when there are no crises. |
| Keywords: | fiscal policy; monetary policy; unconventional monetary policy; Monetary Union; financial frictions; Regime-Switching Models |
| JEL: | E58 E63 F45 |
| Date: | 2025–05–07 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:99977 |
| By: | Andrés Rodríguez-Clare; Mauricio Ulate; Jose P. Vasquez |
| Abstract: | We use a dynamic trade and reallocation model with downward nominal wage rigidities to quantitatively assess the economic consequences of the recent increase in the U.S. tariffs on imports from Mexico, Canada, and China, as well as the “reciprocal” tariff changes announced on “Liberation Day” and retaliatory measures by other countries. Higher tariffs trigger an expansion in U.S. manufacturing employment, but this comes at the expense of declines in service and agricultural employment, with overall employment declining as lower real wages reduce labor-force participation. For the United States as a whole, real income falls around 1% by 2028, the last year we assume the high tariffs are in effect. Importantly, our analysis disaggregates the U.S. into its 50 states, while incorporating cross-state redistribution of the tariff-generated fiscal revenue, allowing us to analyze which states gain or lose more from the shock. Around half of the states lose, with some states experiencing real income declines of more than 3%. Turning to cross-country results, some close U.S. trading partners—like Canada, Mexico, China, and Ireland—suffer the largest real income losses. |
| Keywords: | trade; Trade Dynamics; reallocation; downward nominal wage rigidity; tariffs |
| JEL: | F10 F11 F13 F16 F40 F42 |
| Date: | 2025–04–22 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:99957 |
| By: | Thomas Klitgaard |
| Abstract: | The obvious answer to the question of why the United States runs a trade deficit is that its export sales have not kept up with its demand for imports. A less obvious answer is that the imbalance reflects a macroeconomic phenomenon. Using national accounting, one can show deficits are also due to a persistent shortfall in domestic saving that requires funds from abroad to finance domestic investment spending. Reducing the trade imbalance therefore requires both more exports relative to imports and a narrowing of the gap between saving and investment spending. |
| Keywords: | trade; exports; imports; current account; deficit; balance; saving; investments spending; trade policy; international; macroeconomics |
| JEL: | F4 |
| Date: | 2025–05–20 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:99992 |
| By: | Jean-Pierre Landau (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | This Policy Insight examines a set of proposals gaining traction among economists and policymakers aligned with the new US administration, who seek to overhaul the global trading and financial system to better serve US economic interests. Departing from traditional protectionism, this emerging approach embraces tariffs as tools for revenue generation and burden sharing, while framing persistent trade deficits as symptoms of broader macroeconomic imbalances - particularly a chronically overvalued dollar driven by global capital inflows. These inflows, the authors argue, result from both domestic distortions in surplus economies like China and the dollar's role as the world's dominant reserve currency. The proposed remedies include unconventional measures, such as penalising foreign reserve accumulation in dollars, accepting a reduced international role for the currency as a necessary trade-off for revitalising US industry and correcting current account imbalances. Drawing primarily on recent work by Miran (2024) and Pettis and Hogan (2024), the Insight explores the technical underpinnings of the ‘new arrangement' and assesses its implications for the long-term health of the US economy. |
| Keywords: | International Finance, International Trade |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05043295 |
| By: | Yin-Wong Cheung; Wenhao Wang; Frank Westermann |
| Abstract: | A modified dynamic model averaging framework, which allows for inferences regarding the shifting relevance and significance of explanatory variables, is employed to evaluate the in-sample performance of exchange rate models. This analysis is based on a set of 16, 384 model specifications derived from 14 canonical and newly introduced explanatory variables. Our findings indicate: (a) frequent changes in the model specification that best describes an exchange rate, (b) the relevance of individual explanatory variables is not stable over time and varies across exchange rates, with these variables exhibiting differential and sometimes opposing effects, and displaying non-uniform strengths across different exchange rates and periods, (c) the combination of economic and/or financial variables that enhances the empirical evidence of purchasing power parity (PPP) is specific to each exchange rate. These results underscore the challenges associated with employing a single exchange rate model or the scapegoat hypothesis to describe all exchange rates across all time periods. |
| Keywords: | Bayesian dynamic model averaging, explaining exchange rates, in-sample performance, purchasing power parity deviations. |
| JEL: | C11 F31 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11852 |
| By: | Flores Zendejas, Juan; Nodari, Gianandrea |
| Abstract: | This paper adopts a historical perspective to examine the geopolitical dimensions of monetary policy, focusing on the 1930s. During this period, Stabilization Funds were established to promote exchange rate stability as nations abandoned the gold exchange standard. These entities intervened in foreign exchange markets and extended stabilization loans to other countries. This article analyzes the experience of the U.S. Exchange Stabilization Fund (ESF), situating it within the broader context of global economic fragmentation and the formation of currency blocs. The analysis reveals that rivalries with foreign powers significantly influenced the outcomes of these loans, and the political conditions attached to them delineated the boundaries of the expanding "dollar bloc." The U.S. ESF emerged as a pivotal instrument, enabling the United States to secure trade markets while bolstering the war efforts of allied nations. |
| Keywords: | Economic fragmentation, Great depression, Geopolitical competition, Currency crises, Dollar diplomacy |
| JEL: | N16 N22 N26 F15 F34 F36 F53 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:gnv:wpaper:unige:185041 |
| By: | Cameron Haas (Department of Economics, UMass Amherst); Mateo Hoyos (Department of Economics, CIDE); Emiliano Libman (Conicet, Argentina); Guilherme K. Martins (Department of Economics, University of Leeds); Arslan Razmi (Department of Economics, UMass Amherst) |
| Abstract: | After decades of low and stable inflation, recent global events —such as the COVID-19 pandemic and the Russian invasion of Ukraine—triggered a resurgence in inflationary pressures, prompting central banks worldwide to tighten monetary policy. This paper examines whether monetary policy effectively curbs inflation by employing a trilemma-based identification strategy on a panel dataset of 36 developing and 8 developed economies from 1990 to 2017. Using higher-frequency monthly data, we improve on traditional quarterly or annual approaches by more precisely capturing central bank responses. By applying our theory-driven, trilemma-based identification strategy to a sample of developing countries, we bring novel insights to existing literature. Our findings indicate that monetary policy shocks have significant but impermanent effects on inflation. A 100 basis point interest rate hike lowers the price level by 3.7% at its peak after six months, with effects fading within 18 months. Crucially, our results do not exhibit the “price puzzle, ” reinforcing the credibility of our identification strategy. Additionally, we find that monetary policy effects are state-dependent, with stronger disinflationary impacts during high-inflation periods and in economies with lower GDP per capita or higher commodity export dependence. These findings highlight the heterogeneity in monetary policy transmission, underscoring the need for tailored policy responses across different economic contexts. |
| Keywords: | interest rates, monetary experiments, trilemma, instrumental variables, local projections |
| JEL: | E01 E30 E32 E44 E47 E51 F33 F42 F44 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:emc:wpaper:dte650 |
| By: | Blaise Gnimassoun; Carl Grekou; Valérie Mignon |
| Abstract: | Premature deindustrialization in most emerging and developing economies is one of the most striking stylized facts of the recent decades. In this paper, we provide solid empirical evidence supporting that the choice of a fixed exchange rate regime accelerates this phenomenon. Relying on a panel of 146 developed, emerging, and developing countries over the 1974-2019 period, we show that fixed exchange rate regimes have had a negative, significant, and robust effect on the size of the manufacturing sector—developing countries being the most affected by the industrial cost of such a regime. Additional gravity model regressions show that the impact of fixed regimes passes through the trade channel. In particular, this regime has kept countries with low relative productivity in a state of structural dependence on imports of manufactured products to the detriment of the emergence of a strong local manufacturing sector. |
| Keywords: | Exchange rate regimes; (De)industrialization; Manufacturing; Developing countries; Emerging economies. |
| JEL: | E42 F43 F45 F6 O14 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ulp:sbbeta:2025-02 |