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on International Finance |
| 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 |
| 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: | 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: | Benjamin Mosk; Nander de Vette |
| Abstract: | This paper investigates the phenomenon of financial fragmentation within the euro area and focuses on its implications for bond market stability. A three-step approach is used to assess the sensitivity of credit risk premiums to identified global risk shocks, distinguishing between regimes of higher and lower fragmentation. First, a time-varying indicator of euro area financial fragmentation is constructed on the basis of a principal component analysis of sovereign yield changes. The indicator reflects the extent to which yields across different country groupings—often characterized by differing structural and financial market conditions—move in opposite directions. Second, we construct a series of identified global risk shocks using a signrestricted Bayesian vector auto-regression model applied to a set of financial market variables. Third, we assess bond market stability/fragility in terms of the responsiveness of credit risk premiums to global risk shocks, using a non-linear panel local projections method, distinguishing between regimes of higher and lower fragmentation. We find that during times of elevated fragmentation, both sovereign CDS premiums and corporate option-adjusted spreads react more strongly to a given global risk shock. This elevated sensitivity appears across both country groupings, suggesting that in the higher-fragmentation regime, bond markets are more vulnerable throughout the euro area. These findings indicate that efforts to strengthen financial integration could contribute to greater bond market resilience. |
| Keywords: | financial fragmentation; credit risk premiums |
| Date: | 2025–09–26 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/194 |
| By: | Zhengyang Jiang; Hanno Lustig; Stijn Van Nieuwerburgh; Mindy Z. Xiaolan |
| Abstract: | In a monetary union, the risk-free rate cannot adjust to country-level fiscal positions, leaving only default spreads and convenience yields to respond. Empirically, we find that convenience yields explain a large share of the variation in Eurozone sovereign bond yields. Eurozone sovereign bonds earn larger convenience yields when their governments run larger surpluses. Since convenience yields generate substantial seigniorage revenue from debt issuance, our estimates imply economically large fiscal costs from low convenience yields for peripheral countries in the Eurozone. |
| JEL: | E42 F33 G15 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34307 |
| By: | Fernando Broner; Alberto Martin; Josefin Meyer; Christoph Trebesch |
| Abstract: | How do shifts in the global balance of power shape the world economy? We propose a theory of alignment-based “hegemonic globalization, †built on two central premises: countries differ in their preferences over policies (such as the rule of law or regulatory frameworks) and trade between any two countries increases with the degree of alignment in these policies. Hegemons promote policy alignment and thereby facilitate deeper trade integration. A unipolar world, dominated by a single hegemon, tends to support globalization. However, the transition to a multipolar world can trigger fragmentation, which is particularly costly for the declining hegemon and its closest allies. To test the theory, we use international treaties as a proxy for alignment and compile a novel "Global Treaties Database, " covering 77.000 agreements signed between 1800 and 2020. Consistent with the theory, we find that hegemons account for a disproportionate share of global treaty activity and that treaty-signing is a leading indicator of increasing bilateral trade. |
| Keywords: | Hegemon, globalization, trade integration, international coercion, international treaties, cooperation, multipolar world |
| JEL: | F02 F15 F50 F51 F55 F60 P45 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:upf:upfgen:1907 |
| 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: | David Beers; Obiageri Ndukwe; Joe Berry |
| Abstract: | The BoC–BoE database of sovereign debt defaults, published and updated annually by the Bank of Canada and the Bank of England, provides comprehensive estimates of stocks of government obligations in default. The 2025 edition highlights a decline in the US-dollar value of sovereign debt in default and provides more data about defaults on China’s official loans. |
| Keywords: | Debt management; Development economics; Financial stability; International financial markets |
| JEL: | F3 F34 G1 G10 G14 G15 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsan:25-24 |
| By: | Florencia Airaudo; Francois de Soyres; Alexandre Gaillard; Ana Maria Santacreu |
| Abstract: | This paper analyzes recent structural transformations in the global economic system, emphasizing the increasing geopolitical fragmentation and strategic realignments driven primarily by technological competition. We focus on China’s rise as a technological competitor. We introduce novel quantitative metrics such as the Export Similarity Index, the Partner Similarity Index, and the Ideal Point Distance to examine global shifts in trade patterns and sectoral competition. Our findings highlight competitive pressures in critical sectors, including machinery and advanced manufacturing, with implications for geopolitical alignment and economic stability. We explore strategic policy responses by major economies, with a particular focus on the evolving policy stance of the Euro Area and assess emerging vulnerabilities stemming from changing patterns of import dependence. We conclude by discussing the broader implications of these developments for economic resilience and policy strategy in an increasingly fragmented global economy. |
| Keywords: | global trade; geopolitical fragmentation; strategic rivalry; critical minerals; global supply chains; Euro area; China |
| JEL: | F13 F14 F15 O33 |
| Date: | 2025–10–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:101882 |
| By: | Beschin, Anna; Paredes, Joan; Polichetti, Gaetano; Renault, Théodore |
| Abstract: | This paper contributes to the literature on the price Phillips curve by exploiting subnational regional data from 11 euro area countries. Beyond controlling for aggregate fluctuations common across euro area regions, our approach accounts for country-specific dynamics, including national inflation expectations, thereby addressing key limitations in previous studies. Our results suggest that the Phillips curve in the euro area is relatively flat, but statistically significant. Furthermore, we provide novel evidence on potential nonlinearities in the price Phillips curve and highlight the critical role of properly accounting for country-specific factors such as inflation expectations. These findings provide new insights for the conduct of monetary policy and underscore the value of regional data in euro area macroeconomic analysis. JEL Classification: E24, E30, E31 |
| Keywords: | heterogeneity, non-linearity, price Phillips curve, regional data |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253133 |