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on International Finance |
| By: | Florencia Airaudo; Francois de Soyres; Keith Richards; Ana Maria Santacreu |
| Abstract: | Recent geopolitical tensions have revived interest in understanding the economic consequences of geopolitical fragmentation. Using bilateral trade flows, portfolio investment data, and detailed records of economic policy interventions, we revisit widely-used geopolitical distance metrics, specifically the Ideal Point Distance (IPD) derived from United Nations General Assembly voting. We document substantial variability in measured fragmentation, driven significantly by methodological choices related to sample periods and vote categories, especially in the wake of Russia’s 2022 invasion of Ukraine. Our results show robust evidence of increasing fragmentation in both trade flows and economic policy interventions among geopolitically distant country pairs, with particularly strong effects observed in strategically important sectors and policy motives. In contrast, financial portfolio allocations exhibit weaker, more heterogeneous, and context-sensitive responses. These findings highlight the critical importance of methodological transparency and careful specification when assessing geopolitical realignments and their implications for international economic relations. |
| Keywords: | Fragmentation; Geoeconomics; Trade; Financial Flows |
| JEL: | F14 F36 F50 F60 |
| Date: | 2025–05–14 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:1408 |
| By: | Adrián Fernandez-Perez (Michael Smurfit Graduate Business School, University College Dublin, Ireland.); Marta Gómez-Puig (Department of Economics and Riskcenter, Universitat de Barcelona, Spain.); Simón Sosvilla-Rivero (Complutense Institute for Economic Analysis, Universidad Complutense de Madrid, Spain.) |
| Abstract: | The sovereign debt crisis in the euro area revealed that European Monetary Union (EMU) government bond markets interact in a highly synchronised network and that risk particular to a country or sovereign bond yield component cannot be appropriately evaluated in isolation without taking potential risk transmission effects from other countries or sovereign bond yield components into consideration. Therefore, in clear contrast with the empirical evidence based on Granger-causality tests, the main contribution of the paper comes from the analysis of the transmission of credit and liquidity risk by examining a broad network of relations between the two risks in nine EMU sovereign debt markets from 2008 to 2018, explicitly examining the net pairwise connectedness among all the possible pairs formed from the 18 sovereign risk indicators. The results of this analysis indicate that, on average, risk transmission goes mostly from credit to liquidity risk (both within and across countries). This finding is crucial for policymakers because it indicates that rising credit risk is the primary driver of yield spread increases, and actions to strengthen the budgetary position of euro-area economies are essential. Finally, our results indicate that sovereign risk transmission is time-varying. Although both liquidity and credit risk were transmitted across countries during the Global Financial Crisis, we mainly observed the transmission of liquidity risk across them during the European sovereign debt crisis, suggesting that investors prefer sovereign debt that is easier to trade when market liquidity dries up. |
| Keywords: | Liquidity; Credit risk; EMU sovereign bonds; MTS bond market; Dynamic connectedness; Time-varying parameters. JEL classification: C22, C53, G12, G14, G15. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:ira:wpaper:202504 |
| By: | Roberto Gomez Cram; Howard Kung; Hanno Lustig; David Zeke |
| Abstract: | Unfunded fiscal shocks are a significant source of risk premia in Treasury markets when central banks and governments decide to insulate taxpayers and expose bondholders' wealth to government funding needs. We illustrate this bond risk premium mechanism analytically in a two-agent model featuring monetary-fiscal interactions and a fraction of constrained agents. Surprise government transfer spending devalues real Treasury payoffs through fiscal inflation, while fiscal redistribution makes these high marginal utility states for bond investors, leading to risky government debt. We show that this fiscal redistribution mechanism can quantitatively explain the nominal term premium in a TANK framework. |
| JEL: | E62 G12 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33769 |
| By: | Harrison Hong; Jeffrey D. Kubik; Edward P. Shore |
| Abstract: | We find that the price volatility of renewable assets is significantly greater than that of brown assets. Our causal estimates leverage the response of electricity and credit markets to US state-level renewable portfolio standards that require some utilities to use renewables while exempting others. This extra risk is related to more volatile electricity prices and revenues, consistent with uncertainties including renewables intermittency. Using a growth model where the share of green capital balances climate damages and diversification benefits, we find that greater green-asset volatility is a more important determinant of economy-wide decarbonization than productivity differences of green versus brown capital. |
| JEL: | G10 G11 Q20 Q4 Q54 Q56 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33789 |
| By: | Anna Ignatenko; Ahmad Lashkaripour; Luca Macedoni; Ina Simonovska |
| Abstract: | On April 2, 2025, President Trump declared “Liberation Day, ” announcing broad tariffs to reduce trade deficits and revive U.S. industry. We analyze the long-term economic impacts of these tariffs through the lens of a trade model that features flexible tariff passthrough and endogenous trade deficits, calibrated to trade and income data from 194 countries. If trading partners do not retaliate, the tariffs could decrease the U.S. trade deficit and improve its terms of trade, yielding modest welfare gains when tariff revenues reduce the income tax burden for American workers. However, reciprocal retaliation results in net welfare losses for the U.S. economy. We derive the unilaterally optimal tariff within our model and show that the USTR tariffs, based on bilateral deficits, differ markedly from this theoretical benchmark. Our calibrated model implies a unilaterally optimal tariff for the U.S. of 19 percent, uniformly applied across all trading partners, and linked to the overall trade deficit rather than bilateral imbalances. Under optimal foreign retaliation to the USTR tariffs, the calibrated model predicts a decline in U.S. welfare by up to 3.8 percent when accounting for input-output linkages, and a contraction in global employment by 1.1 percent. |
| JEL: | F1 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33771 |