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on International Finance |
| By: | Friederke Niepmann; Leslie Sheng Shen; Friederike Niepmann |
| Abstract: | How do banks respond to geopolitical risk, and is this response distinct from other macroeconomic risks? Using U.S. supervisory data and new geopolitical risk indices, we show that banks reduce cross-border lending to countries with elevated geopolitical risk but continue lending to those markets through foreign affiliates---unlike their response to other macro risks. Furthermore, banks reduce domestic lending when geopolitical risk rises abroad, especially when they operate foreign affiliates. A simple banking model in which geopolitical shocks feature expropriation risk can explain these findings: Foreign funding through affiliates limits downside losses, making affiliate divestment less attractive and amplifying domestic spillovers. |
| Keywords: | geopolitical risk, bank lending, credit risk, international spillovers |
| JEL: | F34 F36 G21 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12145 |
| By: | Carol Bertaut; Ester Faia; Ṣebnem Kalemli-Özcan; Camilo Marchesini; Simon Paetzold; Martin Schmitz |
| Abstract: | We use administrative security-level data from the U.S. and Euro Area (EA) portfolios to estimate asset demand and supply elasticities by exploiting exogenous variation in bond-specific currency wedges. Employing a Bartik-style shift-share identification approach, we document extensive heterogeneity in investor demand responsiveness to exogenous changes in the price of currency risk, conditional on the issuer characteristics. Demand for AE-bonds is always inelastic, whereas for EM-bonds, elasticity depends on investor type and currency: insurance/pension, nonbanks and banks have finite-elastic demand for EM-bonds that are issued in their own (investor) currency. For EM-issuer-currency bonds, only EA non-bank investors increase the share of these bonds in their portfolio when currency wedges widen, suggesting they accept higher currency risk for higher returns. In response, issuers adjust their supply endogenously: an exogenous increase of 8 basis point in currency wedges leads to a 0.26% decline in local currency bond issuance relative to GDP. We develop a theoretical framework where debt issuance decisions take into account heterogenous demand of investors in terms of their response to changes in the price of currency risk. |
| JEL: | F30 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34275 |
| By: | Győző Gyöngyösi; Judit Rariga; Emil Verner |
| Abstract: | We study how foreign currency debt exposure shapes household adjustment to a large exchange rate depreciation. Using household survey and bank customer data during Hungary's 2008 currency crisis, we find that foreign currency borrowers cut consumption one-for-one with increased debt service, consistent with a foreign currency Fisher channel. Both the quantity and quality of expenditures decline, indicating a "flight from quality." Debt revaluation has a limited effect on overall labor supply, but there is substitution toward foreign income and home production. Our findings point to the relevance of open-economy models with incomplete markets, heterogeneous foreign currency exposures, and liquidity constraints. |
| JEL: | D12 E20 E3 F3 F30 F31 F34 G01 G5 G51 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34234 |
| By: | Anaya Longaric, Pablo; Kostakis, Vasileios; Parisi, Laura; Vinci, Francesca |
| Abstract: | Europe’s lack of energy independence raises concerns about its vulnerability to external energy shocks, such as Russia’s 2022 invasion of Ukraine. This paper examines how energy shocks impact firm-level investment, comparing European and US firm responses. Using global oil supply news shocks, S&P’s Compustat data, and a local projections approach, the study reveals that European firms significantly cut capital and R&D expenditures after an oil shock, unlike US firms. The disparity is primarily driven by financially constrained firms in energy-intensive sectors. Additionally, differences in capital market structures play a role, as European firms relying more on market-based financing reduce investment by less. Lastly, our analysis confirms that the US shale revolution was a contributing factor in shaping Europe’s relative vulnerability. These findings highlight the need for national and EU policies to securethe energy supply, lower prices, and deepen capital markets, enhancing resilience and future competitiveness amid energy volatility. JEL Classification: D22, E22, F15, Q43 |
| Keywords: | competitiveness, corporate investment, energy, oil shocks |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253116 |
| By: | Paul Hubert; Rose Portier |
| Abstract: | This paper establishes the asymmetric transmission of monetary policy to nominal yields of the four largest euro area countries. We document that the effect of easing monetary surprises is stronger than the effect of monetary tightening. The asymmetry holds beyond the nonlinearities related to the economic or financial environment and does not stem from information effects. We provide evidence that this asymmetry is driven by signals about the future policy path. Decomposing euro area interest rates between common and country-specific components, we show that the common component, likely capturing expectations of future short-term rates, generates the differentiated effects, while risk premium signals amplify the asymmetry. Using textual analysis to extract policymakers’ signals about the future monetary policy space from press conferences, we find that central bank communication can affect this asymmetric transmission to yields. Our results suggest a key role for the signaling channel in determining long-term interest rates. |
| Keywords: | Term Structure, Asymmetric Effects, Central Bank Communication, Signaling, Long-Term Interest Rates |
| JEL: | E43 E52 E58 G12 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:999 |
| By: | Daniel J. Wilson |
| Abstract: | Understanding the effects of weather on macroeconomic data is critically important, but it is hampered by limited time series observations. Utilizing geographically granular panel data leverages greater observations but introduces a “missing intercept” problem: “global” (e.g., nationwide spillovers and GE) effects are absorbed by time fixed effects. Standard solutions are infeasible when the number of global regressors is large. To overcome these problems and estimate granular, global, and total weather effects, we implement a two-step approach utilizing machine learning techniques. We apply this approach to estimate weather effects on U.S. monthly employment growth, obtaining several novel findings: (1) weather, and especially its lags, has substantial explanatory power for local employment growth, (2) shocks to both granular and global weather have significant immediate impacts on a broad set of macroeconomic outcomes, (3) responses to granular shocks are short-lived while those to global shocks are more persistent, (4) favorable weather shocks are often more impactful than unfavorable shocks, and (5) responses of most macroeconomic outcomes to weather shocks have been stable over time but the consumption response has fallen. |
| Keywords: | weather; Macroeconomic fluctuations; employment growth; granular shocks |
| JEL: | Q52 Q54 R11 |
| Date: | 2025–09–23 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:101766 |
| By: | Gary B. Gorton; Chase P. Ross; Sharon Y. Ross |
| Abstract: | Banks can use the discount window to fend off a run by prepositioning assets with the Fed and borrowing against them. Following the March 2023 bank runs, policymakers have considered mandatory prepositioning, arguably the largest update to the lenderof-last-resort toolkit in over a century. We study the forces that shape the largest banks’ prepositioning. We show that run-prone uninsured-deposit flows causally drive prepositioning and that banks face a prepositioning stigma, even absent borrowing. Prepositioning is no panacea—banks still need good assets to borrow against—but it can help at the margin. |
| JEL: | E02 G20 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34266 |
| By: | David R. Baqaee; Ariel Burstein |
| Abstract: | This paper quantifies misallocation caused by limited risk-sharing and imperfect consumption-smoothing. We measure these losses in terms of how much of society’s resources would be left over if financial markets were complete and each consumer were compensated to maintain their status-quo welfare. Using exact formulas and approximate sufficient statistics, we analyze standard incomplete-market environments—ranging from closed-economy Bewley-Aiyagari models to multi-country settings with input-output linkages. We find that incomplete insurance against household-level idiosyncratic risk is very costly—about 20% of aggregate consumption—based on both structural models and sufficient-statistics computed using household consumption panel data. By contrast, the cost of imperfect international financial markets (abstracting from within-country heterogeneity) is roughly 5%, driven by the inclusion of fast-growing economies such as China and India. Unexploited risk-sharing opportunities among countries at similar levels of development, on the other hand, are fairly limited (less than 1%). |
| JEL: | E0 F0 F1 F30 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34233 |
| By: | Jouvanceau, Valentin; Darracq Pariès, Matthieu; Dieppe, Alistair; Kockerols, Thore |
| Abstract: | This paper examines the macroeconomic impact of substantial tariffs imposed by the second Trump administration on imports from China and the euro area and their transmission through direct and indirect channels. Using the ECB-Global 3.0 semi-structural model, we show that tariffs raise US import prices and lead to tighter US monetary policy, with the managed float of the renminbi partly offsetting adverse effects in China, while appreciation of the dollar undermines US export competitiveness. In the euro area, euro depreciation provides limited output support but intensifies imported inflation and triggers additional policy tightening. We assess the sensitivity of these results to key assumptions, such as the global amplification of inflation via dominant US dollar invoicing, partial trade diversion, and alternative monetary policy frameworks that attenuate monetary tightening and output contraction. Quantitative assessments of tariffs enacted up to 26 May 2025 and of an escalation scenario indicate significant global output losses and heightened inflationary pressures, requiring widespread policy rate increases. Further escalation of the trade conflict magnifies these effects. These findings quantify the economic cost of tariff related trade disputes and highlight the challenges central banks face in navigating the trade off between price stability and growth. JEL Classification: F12, F41, F42 |
| Keywords: | dominant-currency pricing, open-economy, semi-structural model, tariffs |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253117 |
| By: | Marco Pinchetti |
| Abstract: | Geopolitical shocks are not all alike -- different classes of geopolitical shocks can have different macroeconomic implications, particularly on inflation. This paper exploits the comovement between the Geopolitical Risk Index (GPR) developed by Caldara and Iacoviello (2022) and oil prices across major geopolitical events to disentangle two types of geopolitical shocks within a structural VAR model for the US economy. The VAR estimates suggest that geopolitical shocks associated with disruptions in energy markets are on average inflationary and contractionary. In contrast, geopolitical shocks associated with macroeconomic developments that are unrelated to energy markets are on average deflationary and contractionary. To validate this interpretation, the paper exploits the heterogeneity across sectoral output and prices of the US economy to show that a sector’s response to a geopolitical shock depends on its energy intensity. Sectors characterized by higher energy intensity are subject to larger output losses and price increases in response to geopolitical energy shocks. |
| Keywords: | Geopolitical Risk, Business Cycles, Energy, High-Frequency Sign Restrictions, High-Frequency Identification. |
| JEL: | E31 E32 Q41 Q43 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:1005 |
| By: | Pinelopi K. Goldberg; Michele Ruta |
| Abstract: | This paper revisits the relationship between international trade, trade policy, and development in light of the structural, policy, and geopolitical shifts that have transformed globalization over the past decade. While trade has historically supported development through both static and dynamic channels, we argue that the latter—those inducing structural transformation and institutional change—have been far more consequential for long-run development. Through access to global markets, participation in global value chains, and knowledge and technology transfers, and by providing an anchor for reform, trade and trade agreements have contributed to productivity gains, technological progress, quality and skill upgrading, and institutional change in many low- and middle-income countries. Yet, the conditions that enabled these effects—technologically driven declines in transportation and communication costs, fragmentation of the production process, liberal trade regimes, multilateralism and geopolitical stability—are changing. Automation, digitization, climate change, the return of industrial policy in advanced economies, and the rise of geopolitical rivalry are reshaping the global trade environment. In this new context, the scope for replicating past export-led growth successes is unlikely as two key growth mechanisms, access to the lucrative markets of advanced economies and knowledge sharing, are under threat. We discuss whether trade in services and the green transition may offer new opportunities, emphasizing that future prospects will depend on policy choices in large economies and the adaptability of developing countries. |
| JEL: | F1 O1 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34283 |
| By: | Isaiah Andrews; Maryam Farboodi |
| Abstract: | Economic theory predicts that transformative technologies may influence interest rates by changing growth expectations, increasing uncertainty about growth, or raising concerns about existential risk. Examining US bond yields around major AI model releases in 2023-4, we find economically large and statistically significant movements concentrated at longer maturities. The median and mean yield responses across releases in our sample are negative: long-term Treasury, TIPS, and corporate yields fall and remain lower for weeks. Viewed through the lens of a simple, representative agent consumption-based asset pricing model, these declines correspond to downward revisions in expected consumption growth and/or a reduction in the perceived probability of extreme outcomes such as existential risk or arrival of a post-scarcity economy. By contrast, changes in consumption growth uncertainty do not appear to drive our results |
| JEL: | E43 E44 G1 G12 G14 O30 O4 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34243 |