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on International Finance |
| By: | Gordon Y. Liao; Eswar S. Prasad; Tony Zhang |
| Abstract: | We show that the dollar remains dominant in most aspects of global finance. The euro and renminbi are competing in an increasingly fragmented second tier of currencies, leaving no clear rivals to the dollar. We study how financial innovation could reshape the international monetary system. In principle, innovation levels the playing field between countries, for instance by reducing the need for vehicle currencies to intermediate transactions between other currency pairs and by making it easier to acquire and trade foreign assets. We show that an alternative outcome is more likely. Innovations that reduce frictions in cross-border transactions, especially dollar-backed payment stablecoins and other forms of tokenization of money, could interact with relative market thickness to reinforce the dollar’s dominance. This outcome is not preordained but depends on other countries’ willingness to embrace innovations and strengthen their financial markets and regulatory frameworks. While unipolarity has many disadvantages, we show that in some circumstances multipolarity might result in greater global fragility at times of financial market stress. |
| JEL: | E42 E51 F33 F36 G15 G33 O33 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35822 |
| By: | Michael D Bordo (Rutgers University and NBER); Cecile Bastidon (U. Toulon & CAC-IXXI Complex Systems Institute, Lyon, and OFCE-Sciences Po, Paris) |
| Abstract: | We propose stress tests based on an original International Monetary System (IMS) model with regime switchings. The model is calibrated for nine reference currencies from the beginning of the Classical Gold Standard to the present. Regime switchings in currency dominance are related to combinations of conditions on a multidimensional environment variable that includes five classes of shocks: technology; development; monetary, financial and fiscal institutions; democracy and conflicts; and the regulatory environment. We provide an original database of events for these five classes of shocks, which is used for calibration. The calibration highlights the important role of the democracy and conflicts component in regime switchings. The calibrated model is then used to perform stress tests on the current prospects of currency dominance for a broad set of scenarios. A salient result from the scenarios we tested is that the dominance of the US dollar is at most marginally affected. No other currency emerges as a major player, suggesting strong inertia in the system’s current centripetal dynamics. |
| Keywords: | International monetary system; Currency dominance; Democracy; Conflicts; Geopolitics; Monetary and financial graphs; Non-linear modeling; Conditional Markov chains |
| JEL: | C3 C82 E42 F33 G15 N2 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:pri:cepsud:355 |
| By: | Gootjes, Bram; Pallan, Hayley Marie |
| Abstract: | Despite heightened interest in the role of geopolitics and fragmentation for cross-border economic activity, there is limited understanding of the potential scarring effects of adverse global conditions on foreign direct investment (FDI). Accounting for the real-time nature of investor decisions, local projection estimates show that adverse global growth shocks have scarring effects on FDI project announcements for about three years. Beyond the baseline finding, the paper offers three novel results: scarring effects are more subdued in “safe” countries; projects in “strategic” sectors smooth headline announcement fluctuations because they are less sensitive to adverse global growth shocks; and geopolitical positioning plays an important role in the uneven recovery of FDI announcements. The results are robust to a variety of additional exercises, including sample adjustments, alternative shock measures and specifications, and various definitions of institutions, sectors, and geopolitical alignment. |
| Date: | 2026–09–16 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:11452 |
| By: | Fukui, Masao; Nakamura, Emi; Steinsson, Jón |
| Abstract: | Abstract We study the consequences of “regime-induced” exchange rate depreciations by comparing outcomes for peggers versus floaters to the U.S. dollar in response to a dollar depreciation. Pegger currencies depreciate relative to floater currencies and these depreciations are strongly expansionary. The boom is associated with a fall in net exports, and (if anything) an increase in interest rates in the pegger countries. This suggests that expenditure switching and domestic monetary policy are not the main drivers of the boom. We show that a large class of existing models cannot match our estimated responses and develop a model with imperfect financial openness that can. Following a depreciation, uncovered interest parity deviations lower the costs of borrowing from abroad and stimulate the economy, as in the data. The model is consistent with (unconditional) exchange rate disconnect and the Mussa fact, even though exchange rates have large effects on the economy. |
| Keywords: | 38 Economics (for-2020), 3801 Applied Economics (for-2020), 3802 Econometrics (for-2020), 3803 Economic Theory (for-2020), 14 Economics (for), Economics (science-metrix), 3801 Applied economics (for-2020), 3802 Econometrics (for-2020), 3803 Economic theory (for-2020) |
| Date: | 2025–10–11 |
| URL: | https://d.repec.org/n?u=RePEc:cdl:econwp:qt5wq6v1rf |
| By: | Michael D. Bordo (Rutgers University and NBER); Carolyn A. Wilkins (Princeton University and Bank of England) |
| Abstract: | This paper uses the history of private money to assess the conditions under which stablecoins could function safely at scale and what their growth may imply for U.S. monetary power. Historical systems of private money in the United Kingdom, the United States, Canada, Sweden, and Switzerland show that par circulation depended on institutional arrangements rather than payment technology. Drawing on the monetary history of private money, convertibility, and international currencies, the paper identifies five foundations for scalable private money: credible convertibility, high quality and transparent backing, a uniform regulatory perimeter, par clearing infrastructure, and credible crisis management and loss allocation. Stablecoins may improve settlement speed, programmability, and cross-border access, but they do not remove these requirements. Applying this framework to contemporary stablecoins and the GENIUS Act, the paper finds that the Act addresses several of these foundations more fully than others, with crisis management and cross-border coordination less fully developed. Dollar stablecoins could extend the reach of dollar settlement, but historical experience reviewed here suggests that whether this strengthens the dollar system depends both on the institutional framework supporting stablecoins and on the deeper foundations of U.S. monetary dominance: confidence in U.S. institutions, fiscal capacity, monetary credibility, and the rule of law. |
| Keywords: | Stablecoins, digital money, private money, commitment, coordination, crisis management, international role of the dollar, dollar dominance, cross-border cooperation, rules, regulations, rails |
| JEL: | E42 E44 G15 N20 N40 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:pri:cepsud:359 |
| By: | Chaudhary, Manav; Zhiyu Fu, Julie; Li, Jian |
| Abstract: | Many economic questions require estimating the price effect of demand shifts (multipliers) in the bond market. Corporate bonds have salient characteristics that distin guish close versus distant substitutes. We show that accounting for the heterogeneous substitutability between bonds is critical for estimating multipliers correctly. By al lowing for heterogeneous substitution, we find that security-level multipliers are very small—an order of magnitude smaller than the estimate ignoring heterogeneous substi tutability. Nonetheless, portfolio multipliers are substantially larger and monotonically increase with the aggregation level. Furthermore, we find that the multiplier is larger for high-yield bonds, longer-maturity bonds, and bonds with greater arbitrage risks. |
| Keywords: | corporate bonds;inelastic demand;mutual funds;demand-based asset pricing |
| JEL: | G10 G12 G23 |
| Date: | 2026–09–19 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:138916 |
| By: | Maria Sole Pagliari |
| Abstract: | This paper identifies AI news shocks from financial markets and traces their macroe-conomic effects in the United States and the euro area. We combine a daily equity factor based on differences in firms’ AI exposures with sign, magnitude, and narrative restrictions in a Bayesian VAR to isolate revisions in AI’s expected economic value. Monthly local projections reveal an investment-led adjustment in the US: capital-goods orders rise early and persistently, while aggregate activity responds more gradually and with greater uncertainty. Producer prices increase before consumer prices, and the expansion spreads from sectors closely connected to the AI production network to the broader economy. In the euro area, equity prices rise and the euro depreciates; import and energy costs feed into inflation before real activity strengthens. Inflation expectations and nominal rates also increase. The results highlight a monetary policy dilemma: financial spillovers and imported price pressures arrive before the broader productive gains from AI adoption. |
| Keywords: | AI news shocks; macroeconomic dynamics; international spillovers; pro-duction networks |
| JEL: | C32 E32 E44 F41 O33 |
| Date: | 2026–10 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:871 |
| By: | Matteo Crosignani; Lina Han; Marco Macchiavelli |
| Abstract: | Geoeconomic risk—the risk that firms incur valuation losses when countries deploy economic, trade, or financial leverage for geopolitical aims—has become a first-order concern for investors. In this post, based on our recent Staff Report, we document that domestic U.S. stocks expose investors to substantial geoeconomic risk through firms’ global supply-chain relationships, affecting investors’ returns and portfolio allocation. We also find that investors are compensated for bearing geoeconomic risk through higher risk premia. |
| Keywords: | mutual funds; Asset allocation; geoeconomic risk; export controls |
| JEL: | G12 F51 F38 |
| Date: | 2026–10–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:103863 |
| By: | García, Juan Angel; Gimeno, Ricardo; Hinds, Piers; Su, Haozhe; Tretyakov, Michael V. |
| Abstract: | This paper investigates the information content of the term structure of inflation risks and its usefulness for understanding inflation dynamics. Using prices of traded zero-coupon inflation caps and floors, we develop a robust non-parametric methodology, combined with a Student’s t-copula, to estimate spot and forward risk-neutral densities at short-, medium-, and long-term horizons, i.e., long-horizon risks are identified from liquid instruments alone, at daily frequency, without forward-starting contracts. Focusing on the euro area over 2009-2026, we show that the term structure of inflation risks provides valuable information about the persistence of inflation shocks and the degree to which changes in the inflation outlook become embedded at longer horizons. We also show that there is marked heterogeneity in the macroeconomic and financial conditions associated to inflation risks across horizons: short- and medium-term risks are mainly associated with current inflation, confidence indicators, commodity prices, and near-term macroeconomic risks, whereas long-term risks are more strongly related to monetary and financial conditions. These findings highlight the importance of analysing the entire term structure of inflation risks rather than relying on a single maturity. JEL Classification: G13, E31, E44 |
| Keywords: | financial conditions, inflation compensation, inflation risks, option prices, risk-neutral densities |
| Date: | 2026–10 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263294 |
| By: | Jarociński, Marek; Karadi, Peter |
| Abstract: | High-frequency interest rate surprises around Fed announcements do not identify monetary policy (MP) shocks if markets are imperfectly informed. Instead, they can also reflect central bank information (CBI) shocks, when the Fed assesses the economy differently, and Fed-response-to-news (FRN) shocks, when markets misperceive the policy rule. The literature treats these as competing explanations; we show they are distinct, and jointly identify all three from the co-movement of interest rate and equity surprises, their predictability from public news, and heteroskedasticity between FOMC and non-FOMC communication. CBI effects are robust at daily and monthly frequencies; FRN matters only daily. Purging both strengthens monetary policy estimates. JEL Classification: E31, E32, E52 |
| Keywords: | Fed chair speeches, high-frequency identification, local projection, monetary policy shock, structural vector autoregression |
| Date: | 2026–10 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263292 |