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on Financial Development and Growth |
| By: | Spyridon Boikos (University of Macedonia, Greece); Theodore Panagiotidis (Department of Economics, University of Macedonia, Greece); Georgios Voucharas (Liverpool Hope University, UK) |
| Abstract: | While significant progress has been made in exploring the importance of financial literacy, its impact on economic growth and financial development from a macroeconomic point of view, remains thinly understood. This paper provides fresh evidence on the relationship between financial literacy, financial development and economic growth. We utilise a novel dataset for 61 countries over the period 1999-2014 and employ a panel quantile regression model. We provide strong evidence that higher financial literacy levels lead to higher GDP per capita growth and the size of the impact is higher at lower quantiles of the conditional growth distribution. As financial development increases, its positive impact on economic growth diminishes, indicating an inverted U-shaped relationship. High levels of financial literacy mitigate the diminishing returns of financial development on GDP per capita growth by an average of 7.41%. Interestingly, in higher quantiles of the conditional growth distribution, the mitigating effect increases to 9.23%. |
| Keywords: | Financial Literacy, Financial Development, Economic Growth, Quantile Regression, Panel Data |
| JEL: | O16 O40 G10 G53 C21 C23 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:rim:rimwps:25-09 |
| By: | Luz Mary Pinzón; Xavier Freixas |
| Abstract: | This paper investigates the relationship between financial development and economic growth, using data from Spanish provinces during a period marked by significant financial events: banking deregulation (1988), a credit and housing boom (2001–2007), and a severe banking crisis (2008–2012). The study pursues three key objectives. First, it examines the impact of credit— distinct from the broader financial environment and institutional infrastructure (e.g., property rights enforcement, accounting standards)—on long-term real per capita GDP growth. Second, it analyzes whether this effect diminishes as the level of credit increases. Third, it evaluates the role of mortgage lending in shaping long-term growth. Our findings indicate that credit exerts a positive influence on both five- and ten-year cumulative growth rates, independent of the broader financial environment, which is largely homogeneous across provinces.At the same time, we observe that the marginal contribution of credit to long-term growth declines as credit levels rise.Despite this diminishing marginal effect, we find no evidence of a "too much of a good thing" effect as: higher credit-to-GDP ratios continue to exert a consistently positive impact. Finally, regarding mortgage credit, we do not find any positive effect of this variable on long-term growth. |
| Keywords: | banking deregulation, credit, economic growth, financial development |
| JEL: | O16 G21 E44 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:bge:wpaper:1512 |
| By: | Takuma Kunieda (School of Economics, Kwansei Gakuin University); Kei Kuwahara (Kunieda Laboratory in School of Economics, Kwansei Gakuin University) |
| Abstract: | This paper empirically examines collateral constraints in the Kiyotaki and Moore [1997. Credit cycles. Journal of Political Economy 105(2), 211-248] model using land price data from three major prefectures in Japan: Tokyo, Osaka, and Hyogo. After confirming the stationarity of land prices, we estimate their dynamic equations and show that they follow a second-order autoregressive (AR(2)) process, consistent with the presence of binding collateral constraints. We further apply the supremum Wald test and identify structural breaks at the onset of the early 1990s asset price bubble collapse. These results suggest that financial frictions played a critical role in shaping land price dynamics in Japan's regional economies. Overall, our findings demonstrate that the Kiyotaki-Moore framework provides a useful tool for capturing the dynamic behavior of financially constrained economies. By providing new regional evidence, this study contributes to the literature on macroeconomics and financial market imperfections. |
| Keywords: | Collateral Constraints, Financial Frictions, Land Price Dynamics, Kiyotaki-Moore Model, Credit Cycles, Regional Economies. |
| JEL: | G12 E32 E44 R30 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:kgu:wpaper:300 |
| By: | Wagner Piazza Gaglianone; Gustavo Silva Araujo; José Valentim Machado Vicente |
| Abstract: | This paper investigates how the Brazilian yield curve has responded to macroeconomic fundamentals over the past two decades. Using a set of OLS regressions applied to short- and long-term interest rates, as well as the yield curve slope, we examine the roles of domestic inflation, fiscal stance, economic activity, and external interest rates. Our findings show that domestic inflation and economic activity, together with U.S. yields, exhibit consistent significance across maturities. Fiscal indicators based on primary surplus, rather than public debt, exert a clear effect on short-term rates and the slope, underscoring the relevance of fiscal flows over fiscal levels. Robustness exercises incorporating financial conditions, credit indicators, and the monetary policy stance confirm that short-term rates are especially responsive to financial signals and regime changes, whereas long-term rates are more strongly influenced by external conditions, credit dynamics, and a persistent monetary stance. The analysis is further extended to real interest rates, confirming the robustness of the main results and highlighting the enduring influence of fiscal flows and credit dynamics on the slope and long-term rates. These findings show the importance of credible fiscal and monetary frameworks and provide new evidence on how emerging market yield curves reflect domestic and external fundamentals. |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:bcb:wpaper:629 |
| By: | Yosuke Fukunishi (Graduate School of Economics, The University of Tokyo); Haorong Qiu (Graduate School of Economics, The University of Tokyo); Akihiko Takahashi (Graduate School of Economics, The University of Tokyo); Fan Ye (Graduate School of Economics, The University of Tokyo) |
| Abstract: | This study introduces a novel generative modeling framework for simulating the term structure of interest rates. In recent years, generative models have achieved significant progress in image generation and are increasingly being applied to finance. To the best of our knowledge, this is the first study to apply a generative model—specifically, a diffusion model—to the term structure of interest rates. Furthermore, we extend the framework to incorporate conditional generation mechanisms and v-parameterization. The training dataset consists of spot yield curves constructed from daily overnight index swap (OIS) rates using cubic Hermite splines. As base conditioning variables, we use short-term interest rates and changes in consumer price indexes (CPIs). Empirical analysis covering the period from 2015 to 2025 demonstrates that our model successfully reproduces the level and shape of yield curves corresponding to historical macroeconomic conditions and short-term interest rate environments. Additionally, when incorporating further conditioning variables related to quantitative easing policies, monetary base, current account balances, and nominal gross domestic product (GDP), we find that the inclusion of quantitative easing indicator notably enhances the model’s output relative to the base conditioning case. This suggests improved robustness and representational capacity under expanded conditioning. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:cfi:fseres:cf605 |
| By: | Yanran Wu; Xinlei Zhang; Quanyi Xu; Qianxin Yang; Chao Zhang |
| Abstract: | We build a 167-indicator comprehensive credit risk indicator set, integrating macro, corporate financial, bond-specific indicators, and for the first time, 30 large-scale corporate non-financial indicators. We use seven machine learning models to construct a bond credit spread prediction model, test their spread predictive power and economic mechanisms, and verify their credit rating prediction effectiveness. Results show these models outperform Chinese credit rating agencies in explaining credit spreads. Specially, adding non-financial indicators more than doubles their out-of-sample performance vs. traditional feature-driven models. Mechanism analysis finds non-financial indicators far more important than traditional ones (macro-level, financial, bond features)-seven of the top 10 are non-financial (e.g., corporate governance, property rights nature, information disclosure evaluation), the most stable predictors. Models identify high-risk traits (deteriorating operations, short-term debt, higher financing constraints) via these indicators for spread prediction and risk identification. Finally, we pioneer a credit rating model using predicted spreads (predicted implied rating model), with full/sub-industry models achieving over 75% accuracy, recall, F1. This paper provides valuable guidance for bond default early warning, credit rating, and financial stability. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2509.19042 |
| By: | Holger Görg, Toshihiro Okubo, Eric Strobl, Maximilian von Ehrlich |
| Abstract: | In this paper we use comprehensive historic firm level data for 1925 to 1938 to estimate productivity spillovers from Japanese textile companies’ affiliates in China (Zaikabo) to local cotton producers in China. We geo-localized firms in order to capture the important role of distance in facilitating productivity spillovers. Our results provide clear evidence for positive productivity spillovers from Zaikabo to local Chinese firms. This goes hand-in-hand with a change in production technology towards greater use of capital (spindles). We also find that spillovers are very localised, being strongest within a radius of up to 10km around the Zaikabo. Furthermore, evidence for spillovers is particularly strong for firms in Shanghai. Our paper is the first to provide evidence for such spillovers from foreign firms in a historical context. |
| JEL: | F23 N65 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:ube:dpvwib:dp2506 |
| By: | Siddharth George; Mr. Divya Kirti; Nils Olle Herman Lange; Maria Soledad Martinez Peria; Rajesh Vijayaraghavan |
| Abstract: | We study how access to bank financing affects product innovation in a developing country context by analyzing a reform that broadened credit eligibility for many small Indian manufacturing firms. Newly eligible firms borrow more but, on average, do not introduce new or more complex products or expand product scope. Many firms appear to operate below efficient scale and use credit to expand existing product lines rather than innovate. Moreover, most firms face several additional barriers that weaken the impact of credit on innovation. Among firms that do not face these additional barriers, credit access boosts innovation, as in advanced economies. |
| Keywords: | Innovation; SMEs; financial frictions; market barriers |
| Date: | 2025–09–26 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/192 |
| By: | Mr. Edward R Gemayel; Asel Isakova; Vidhi Maheshwari |
| Abstract: | The Compact with Africa (CwA) is an initiative launched in 2017 under Germany’s G20 Presidency to promote private investment in Africa through creating a more attractive environment for private investment through policy reforms and improved macroeconomic and business frameworks in member countries. This paper attempts to quantify the impact of CwA membership on FDI inflows. We employ the entropy balancing methodology to improve the credibility of a causal inference between CwA membership and FDI inflows. While we could not conclusively establish causality, our analysis offers other useful insights. Inward FDI data suggests that CwA countries have experienced stronger FDI inflows on average, including during the pre-CwA years. Furthermore, these countries tend to have stronger institutions, better infrastructure and human development, which are among the key factors that help attract FDI to developing countries. Hence, continued efforts of African governments to implement structural reforms, strengthen institutions, improve infrastructure and develop human capital are vital to create an attractive FDI environment, while the CwA initiative could provide a platform for peer-to-peer learning and exchange, capacity building, policy dialogue and collaboration. |
| Keywords: | Compact with Africa; Foreign Direct Investment |
| Date: | 2025–09–26 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/189 |
| By: | Hinh T. Dinh; Laura Rubidge |
| Abstract: | Africa is facing mutually reinforcing challenges, including trade fragmentation, security focused economic policies, fiscal limitations and technological disruption, which have created a development landscape of unprecedented complexity and constraint. At the same time, there is a systematic mismatch between Africa’s long-term development needs and the short-term fiscal and political pressures that dominate policymaking. This policy brief argues that ring-fencing development expenditures is a potential pathway to reconciling this mismatch. Although there are many challenges spanning the technical, political and institutional domains, this policy brief outlines several policy mechanisms to institutionalise ring-fencing of development financing that have proven to be effective in a number of countries. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:ocp:pbecon:pbsaiia_25 |
| By: | Nabil Bouamara; Kris Boudt; Anna Cole; Sebastien Laurent; Christopher J. Neely |
| Abstract: | An analysis examines which types of macroeconomic announcements tend to be most often associated with jumps in U.S. stock prices. |
| Keywords: | stock prices; macroeconomic announcements; high-frequency data |
| Date: | 2025–09–29 |
| URL: | https://d.repec.org/n?u=RePEc:fip:l00001:101824 |
| By: | John Y. Campbell; Carolin Pflueger; Luis M. Viceira |
| Abstract: | This paper documents that during the late 20th Century, nominal government bonds and stocks tended to comove positively, whereas during the first quarter of the 21st Century they have tended to comove negatively. A similar sign switch is observable for real government bonds and breakeven inflation rates. Recent macroeconomic events have caused short-lived changes in these comovements, and periods with high risk premia tend to be periods in which bond-stock comovements are large in absolute value. The paper surveys theoretical models of these phenomena. |
| JEL: | G1 G12 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34323 |
| By: | Jasmina Hasanhodzic; Laurence J. Kotlikoff |
| Abstract: | “Junior Can’t Borrow, ” Constantinides, Donaldson, and Mehra’s (CDM) three-period exchange model, eliminates borrowing by the young, and, consequently, all generations to resolve the equity premium puzzle. This paper examines CDM’s resolution in an 80-period, OLG model with capital, fiscal policy, macro shocks and steeply rising borrowing costs. Imposing such costs on all generations and, thereby, eliminating the bond market produces, as in CDM, a large premium. But permitting even one generation to sell bonds without transactions costs dramatically raises the safe rate, restoring the puzzle. Hence, “No One Can Borrow” not “Junior Can’t Borrow” is CDM’s real message. Since zero or low marginal-cost borrowing is commonplace – be it via secured borrowing or friends and family loans, CDM’s “solution” isn’t plausible. As in representative-agent RBCs, macro risk is low in OLG-RBCs – not because aggregate shocks are small, but because they can be hedged via self-insurance (saving) and largely average out over agents’ lifetimes. Indeed, absent high marginal borrowing costs, agents, even older ones, are close to indifferent between holding shares and holding bonds, rendering their net bond demand (supply) curves highly elastic. This explains why even a single generation is willing to supply significant amounts of bonds at a low price (high yield). |
| JEL: | E0 E44 G0 G12 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34328 |
| By: | Byoung Hoon Seok (Department of Economics, Ewha Womans University, Seoul, Republic of Korea); Donghyun Park (Economic Advisor, Asian Development Bank, Manila, Philippines) |
| Abstract: | This study analyzes the effects of government expenditure composition on economic growth and income inequality in 91 countries from 1990 to 2023, using a Panel Vector Autoregression (PVAR) model. The findings reveal notable differences between advanced and developing economies. In advanced economies, only infrastructure investment consistently promotes growth, while education spending reduces inequality and healthcare expenditures may increase disparities over time. In developing economies, infrastructure investment has a stronger and more persistent impact on growth, but education and healthcare spending exhibit limited redistributive effects. Social transfers show mixed results, with inefficiencies sometimes leading to worsening income inequality. These results highlight the importance of context-specific fiscal policies, ensuring that spending priorities align with national development goals to achieve both economic expansion and equitable distribution. |
| Keywords: | government expenditure, inclusive growth, Panel Vector Autoregression |
| JEL: | E62 H50 O11 O43 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:nan:wpaper:2508 |
| By: | Cara Dabrowski (The Vienna Institute for International Economic Studies, wiiw); Philipp Heimberger (The Vienna Institute for International Economic Studies, wiiw) |
| Abstract: | Public investment can support geoeconomic policy goals by strengthening economic resilience through the creation of public assets and by fostering domestic sources of economic growth. This paper presents new evidence on how public investment affects output, unemployment, private investment and public debt in the 27 EU member countries. Using forecast errors based on archival data to identify public investment shocks, we find that expansionary shocks (a) have favourable effects on output and unemployment in the short to medium run; (b) do not crowd out private investment; and (c) do not jeopardise public debt sustainability. Even though fiscal consolidation pressures linked to EU fiscal rules are high, promoting public investment may be critical – not only for economic development, but also to advance geostrategic goals in energy, infrastructure and resilience. |
| Keywords: | Public investment, growth, unemployment, public debt |
| JEL: | E32 D84 F02 Q41 Q43 Q48 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:wii:pnotes:pn:99 |
| By: | Ricardo J. Caballero; Alp Simsek |
| Abstract: | We develop a model of central bank communication where market participants' uncertainty about desired financial conditions creates misunderstandings ("tantrums") and amplifies the impact of financial noise on asset prices and economic activity. We show that directly communicating the expected financial conditions path (FCI-plot) eliminates tantrums and recruits arbitrageurs to insulate conditions from noise, while communicating expected interest rates alone fails to achieve these benefits. We demonstrate that scenario-based FCI-plot communication enhances recruitment when participants disagree with the central bank regarding scenario probabilities. This enables an "agree-to-disagree" equilibrium where markets help implement central bank objectives despite differing views. |
| JEL: | E12 E32 E44 E52 E58 G10 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34325 |
| By: | Kosuke Aoki (BANCO DE ESPAÑA); Enric Martorell (BANCO DE ESPAÑA); Kalin Nikolov (BANCO DE ESPAÑA) |
| Abstract: | We examine the interplay between monetary policy, bank risk-taking, and financial stability in a quantitative macroeconomic model with endogenous risk-taking by banks and systemic crises. Banks’ access to leverage depends on their charter value, which is itself affected by movements in the real interest rate. We find that permanent shifts in the long-term real interest rate have a significant impact on banks’ leverage and on their investments in systemically risky assets, while transitory movements have a more limited impact. We show that in the presence of systemic risk-taking, the systemic component of monetary policy faces a trade-off between price stability and financial stability. A moderate reaction to inflation deviations from the target is optimal, as it sustains banks’ equity value after financial crises. Seeking price stability reduces inflation volatility but leads to increased systemic risk-taking and more severe financial recessions. The optimal central bank policy combination involves an increase in regulatory bank capital requirements coupled with a moderate reaction of monetary policy to inflation. |
| Keywords: | financial intermediation, monetary policy, systemic risk, macroprudential policy |
| JEL: | E44 E52 E58 G21 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2517 |
| By: | Konrad Kuhmann (Latvijas Banka) |
| Abstract: | Bank lending is a key factor in the transmission of monetary policy to the real economy. Using granular loan data on the euro area, I analyze how bank specialization interacts with the effects of monetary policy on credit. I first document that bank lending in the euro area is characterized by a substantial degree of specialization. That is, banks tend to be over-exposed to borrowers in certain industries and of certain size. I also find that higher specialization is generally associated with more favorable lending conditions. Most importantly, banks partly insulate their preferred borrowers from the consequences of monetary policy. In particular, they adjust interest rates and lending relatively less strongly for borrowers from groups in which they specialize. My findings suggest that bank specialization is relevant for the aggregate and distributional consequences of monetary policy. |
| Keywords: | Bank specialization, Bank lending, Monetary policy, AnaCredit |
| JEL: | E51 E52 G21 |
| Date: | 2025–10–01 |
| URL: | https://d.repec.org/n?u=RePEc:ltv:wpaper:202506 |
| By: | Población García, Francisco Javier; Suárez, Nuria |
| Abstract: | The purpose of this paper is to empirically examine the effects of capital and liquidity on bank stability as well as the existence of a potential complementary or substitute relationship between both dimensions to explain bank stability. We use a sample of 16, 061 banks from 27 countries during the period 2013-2023. Our results show that both capital and liquidity increase bank stability. However, the joint interactive effect presents a negative coefficient indicating the existence of a potential substitution effect between both variables. We also provide evidence on market power acting as a potential mechanism explaining the baseline relationships. Furthermore, the results seem to be modulated by specific bank- and country-level factors. JEL Classification: G20, G21, G28, K00 |
| Keywords: | bank-level characteristics, bank stability, capital, country-level characteristics, liquidity |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253134 |
| By: | Seydina Alioune NDIAYE |
| Abstract: | La stabilité apparente des taux directeurs de la BCEAO (Banque centrale des États de l'Afrique de l'Ouest) masque une réalité bien plus préoccupante : un resserrement monétaire non déclaré dans la zone UEMOA (Union économique et monétaire ouest-africaine) et une rareté accrue de la liquidité qui frappe tout le système. Nous proposons une analyse en profondeur des mécanismes de cette crise bancaire latente, ses manifestations concrètes sur le tissu économique et ses implications pour l'économie sous régionale. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:ocp:pbecon:pb35_25 |
| By: | Paul, Revocatus Washington; Sharma, Dhiraj |
| Abstract: | This paper examines the welfare effects of Tanzania’s 2021 levy on mobile money transfers, a policy that sharply increased transaction costs in a country where mobile money is the primary channel for financial access and remittances. Using two waves of the Tanzania National Panel Survey (2014/15 and 2020/22) combined with high-frequency phone survey data, a triple-difference identification strategy was implemented to isolate the impact of the levy on rural and urban households before and after its introduction. The findings show that rural households—who rely more heavily on mobile money and have fewer financial alternatives—experienced a 10–18 percent decline in per capita food consumption and a significant rise in food insecurity following the levy. Robustness checks using variation in bank penetration, shock incidence, and remittance dependence support these results. |
| Date: | 2025–10–07 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:11228 |
| By: | Stephan Luck |
| Abstract: | Digital currencies have grown rapidly in recent years. In July 2025, Congress passed the “Guiding and Establishing National Innovation for U.S. Stablecoins Act” (GENIUS) Act, establishing the first comprehensive federal framework governing the issuance of stablecoins. In this post, we place stablecoins in a historical perspective by comparing them to national bank notes, a form of privately issued money that circulated in the United States from 1863 through 1935. |
| Keywords: | digital currencies; stablecoins; national bank notes; economic history |
| JEL: | N21 N22 |
| Date: | 2025–10–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:101880 |
| By: | Kenichi Ueda (University of Tokyo); Chanthol Hay (National University of Battambang) |
| Abstract: | Cambodia is one of the two first countries that adopted a retail CBDC in October 2020. The design of the CBDC, called the Bakong, is a bit unique. We find a few design flaws that could potentially damage the central bank and then the Cambodian economy as a whole. We show some key statistics from our own survey in 2022 to clarify our arguments. The Bakong is offered in two currencies, the Khmer Riel (KHR) and the US dollar (USD), as Cambodia has been highly dollarized. We discuss theoretical predictions for the CBDC based on three kinds of substitutes: paper money, bank deposits, and foreign currencies. The third one is specific to the Bakong. Unlike a typical local currency CBDC, the USD Bakong may substitute for the KHR more. Moreover, it has been announced that the retail Bakong is legally not a liability of the central bank, but from the viewpoint of the underlying technology and economics, it is a central bank liability. |
| Date: | 2024–02 |
| URL: | https://d.repec.org/n?u=RePEc:cfi:fseres:cf579 |
| By: | Anaya Longaric, Pablo; Cera, Katharina; Georgiadis, Georgios; Kaufmann, Christoph |
| Abstract: | We explore whether investment funds transmit spillovers from local shocks to financial markets in other economies. As a laboratory we consider shocks to financialmarket beliefs about the probability of a rare, euro-related disaster and their spillovers to Asian sovereign debt markets. Given their geographic distance from and relatively limited macroeconomic exposure to the euro area, these markets are an ideal testing ground a priori stacking the deck against finding evidence for investment funds transmitting spillovers from euro disaster risk shocks. Analyzing proprietary security-level holdings data over the period from 2014 to 2023, we find that investment funds strongly shed Asian sovereign debt in response to euro disaster risk shocks. Markets with greater investment-fund presence exhibit considerably larger price spillovers. The main driver of this sell-off is the need to generate liquidity to meet investor redemption demands rather than portfolio rebalancing. Especially market liquidity determines which sovereign debt investment funds shed. Taken together, our findings suggest that due to a flighty investor base investment funds are powerful transmitters of spillovers from local shocks across global financial markets. JEL Classification: F34, F45, G23 |
| Keywords: | euro disaster risk shocks, investment funds, sovereign debt markets, spillovers |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253131 |
| By: | Tarek Alexander Hassan; Thomas M. Mertens; Jingye Wang; Tony Zhang |
| Abstract: | We develop a general-equilibrium model in which the safety of a country's currency and the choice of its exchange-rate regime arise endogenously. Calibrated to pre-2025 data, the model replicates the U.S. dollar’s safety premium, low Treasury yields, and its status as the world's anchor currency. Introducing a trade war that isolates U.S. goods markets from the world erodes the U.S. dollar's safety premium, raises U.S. interest rates, and lowers the world market value of U.S. firms. For sufficiently high tariffs, small economies optimally re-peg to the euro, precipitating a phase shift to a euro-centric international monetary system and a global welfare loss. The analysis implies that persistent trade wars may threaten the financial privileges the United States derives from the dollar’s international role. |
| JEL: | E22 E4 F1 F3 G12 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34332 |