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on Open Economy Macroeconomics |
| By: | Diaf, Sami; Zakane, Ahmed |
| Abstract: | Gauging the impact of oil price variations on small, oil-exporting countries has been heavily investigated under the umbrella of monetary policy interventions, using a standard general equilibrium framework. For some countries, the monetary policy coordinates with fiscal policy to deliver a better response to external oil shocks in an attempt to make the economic activity resilient to external backlash. This paper investigates the policy mix effectiveness in a small open economy, namely Algeria, and its ability to mitigate a negative oil price shock, using a DSGE model that maps several frictions found in single-commodity economies as for a managed exchange rate regime, the existence of a foreign exchange market accessible to households and a sovereign wealth fund. Simulations show countercyclical fiscal measures (increase in government spending) coupled with monetary interventions have no expansionary effects on output, but still necessary to maintain a resilient economic activity especially for the non-oil sector. Under the sticky prices assumption, households tend to lower their investment and consumptions levels, in addition of using their foreign currency savings as buffer. This results in alleviating potential pressures on the supply side and preventing possible inflation spikes. Findings confirm the effectiveness of a monetary policy based on targeting export products, to better handle the negative terms of trade shock via a slight exchange rate depreciation. However, the fiscal dominance in the policy-mix leads to the accumulation of public debt, which might require fiscal consolidation during protracted periods of declining oil prices. |
| Keywords: | monetary policy; fiscal policy; exchange rate; oil prices; external shock |
| JEL: | E31 E52 E63 F31 F41 H54 H63 Q35 Q38 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:cpm:dynare:083 |
| By: | Grzegorz Wesołowski (University of Warsaw, Faculty of Economic Sciences); Oleg Gurshev (University of Warsaw, Faculty of Economic Sciences) |
| Abstract: | This paper demonstrates that key macroeconomic shocks originating in the United States contribute significantly to business cycle synchronization between the US and other economies. These shocks also account for a substantial part of output fluctuations in these economies. Using panel local projection regressions with small sample refinements, we find that six major US shocks explain 21% - 28% of the forecast error variance in the GDP of open economies over a three-year horizon. Considering individual shock contributions, we document that technology and monetary policy innovations are of the highest relevance. |
| Keywords: | Macroeconomic shocks, International spillovers, International business cycles, Technology shocks, Monetary policy, Financial shocks, Fiscal policy, Investment shocks |
| JEL: | E23 E32 E52 E62 F44 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:war:wpaper:2025-06 |
| By: | Mehmet Burak Turgut (University of Warsaw, Faculty of Economic Sciences); Grzegorz Wesołowski (University of Warsaw, Faculty of Economic Sciences) |
| Abstract: | This paper investigates the domestic and international transmission of U.S. fiscal news shocks emphasizing the importance of the sentiment channel for the global economy. We identify these shocks using federal government spending forecasts from the Survey of Professional Forecasters. Employing the local projection method, we find that anticipated increases in U.S. government spending are expansionary domestically, leading to improved sentiment and enhanced financial conditions. On the other hand, the U.S. dollar appreciates, and the U.S. trade balance deteriorates when future fiscal expansion is expected. In the international context, we apply panel local projection models across a broad set of countries and show that positive sentiment and improved financial conditions driven by U.S. fiscal news spill over, stimulating demand and output growth in other economies. However, we find no significant effect of currency depreciation on net exports in a broad sample as rising domestic demand tends to boost imports. In turn, in a subsample of countries with high trade exposure to the U.S., the trade channel becomes significant, while financial channel diminishes in importance. At the same time, sentiment channel appears to play a significant role in all subsamples. Finally, we find that positive fiscal news shocks have strong stimulating effects (both domestic and international) during US recessions but not in expansions. |
| Keywords: | government spending, news shock, international spillovers, international business cycles |
| JEL: | C32 C33 E32 E62 F41 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:war:wpaper:2025-05 |
| By: | Kaan Celebi; Werner Roeger |
| Abstract: | The new US administration has a clear agenda of reducing imports to the US and attract FDI by reducing tariffs and using the proceeds for supporting investment in the US. This paper uses a dynamic two country US vs RoW model where monopolistically competitive firms make export and FDI decisions. We study how this additional FDI channel affects the impact of import tariffs on the US and RoW economy. We model both the international supply linkages of domestic producers and subsidiaries of foreign firms as well as EoS of FDI sales with domestic products and imports in order to capture cost and demand channels affecting FDI decisions. Concerning the respective elasticities we use both trade elasticities as well as estimates on the effect of tariffs on the import to inward FDI sales ratio. We are in particular interested how the use of tariff revenues affects the outcome of a tariff. We find that a unilateral US tariff with transfers to households has positive effects on US consumption and leads to rising inward FDI and reduces US imports. However, rising production and investment cost reduce total US investment. A real dollar appreciation cushions the effect of tariffs on RoW exporters but increase the cost for production and investment, generating a negative spillover to the RoW. If tariffs are accompanied by investment subsidies the expansionary effects for the US are significantly larger and total US investment becomes positive. This holds especially for FDI flows to the US. The investment boom generated in the US increases world interest rates. This contributes to larger negative spillovers to the RoW. The use of tariff revenues also affects how the US and RoW are affected in case of (full) retaliation. In case of transfers, the US is hit more since higher openness increases cost of production and investment more in the US. This ranking is reversed in case of subsidies. Higher US openness generates more tariff revenues as a share of GDP and therefore more investment subsidies. |
| Keywords: | international trade, foreign direct investment, import tariffs, USA, two-country open economy model |
| JEL: | F13 F21 F23 F41 O24 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:diw:diwwpp:dp2111 |
| By: | Stefano Maria Corbellini |
| Abstract: | This paper analyzes the monetary policy trade-off between defending purchasing power of consumers and keeping moderate debt cost for borrowers, in the framework of a heterogeneous agent New Keynesian open economy hit by a foreign energy price shock. Raising the interest rate indeed combats the loss in purchasing power due to the energy shock through a real exchange rate appreciation: however, this comes at the expense of higher interest payments for debtors. The trade-off can be resolved by adopting a milder interest rate policy during the crisis in exchange for a prolonged contraction beyond the energy shock time span. This interest rate smoothing approach allows to still experience a real appreciation today, while spreading the impact on debt costs more evenly over time. This policy counterfactual is analyzed in a quantitative model of the UK economy under the 2022-2023 energy price hike, where the loss of consumers’ purchasing power and the vulnerability of mortgage costs to higher policy rates have been elements of paramount empirical relevance. |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:ube:dpvwib:dp2502 |
| By: | Imbierowicz, Björn; Nagengast, Arne J.; Prieto, Esteban; Vogel, Ursula |
| Abstract: | The pace of globalization has slowed since the global financial crisis, raising concerns about widespread deglobalization and market fragmentation. We examine the effects of a deglobalization shock on bank lending, firm internal capital markets, and the real economy. Leveraging a unique dataset that combines a credit register with foreign direct investment (FDI) data, we are able to observe both domestic and cross-border credit exposures of German banks as well as internal capital market dynamics within multinational corporations (MNCs) - a feature rarely available in other countries' data. We analyze the response to the Brexit referendum shock. On average, German banks reduced lending to United Kingdom (UK) firms following the shock due to increased uncertainty about future losses. More prudent banks reduced their credit more extensively, and less profitable subsidiaries experienced greater reductions. However, UK subsidiaries of large MNCs, with access to internal capital markets, offset this credit supply shock through internal funding, shielding them from negative real effects. We find that non-UK subsidiaries play a crucial role in internal capital markets by securing external financing and reallocating funds to support UK affiliates. Well capitalized banks reallocated lending to firms outside the UK, particularly those of German MNCs. Our findings underscore that while international financial frictions following deglobalization shocks can imply negative real effects, firms integrated into global networks mitigate these impacts through internal capital markets. |
| Keywords: | Bank lending, deglobalization shock, policy uncertainty, real-financial linkages, internal capital markets |
| JEL: | F23 F34 F36 G21 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:314411 |
| By: | Rongyu Wang (Information Research Institute, Qilu University of Technology (Shandong Academy of Sciences) and University of Edinburgh Author Name: Tim Worrall; School of Economics, University of Edinburgh) |
| Abstract: | This paper considers a repeated version of the International Monetary System model of Fahri and Maggiore (2018) without a direct default cost. Issuance of a safe asset by the Hegemon is sustained by a no-default condition that trades off the short-term benefit of default against the continuation value of not defaulting. In this model, it is optimal for the Hegemon to maintain a constant issuance. The constant issuance policy may however, be unstable. In particular, the no-default condition links current issuance to issuance in the previous period. If the Hegemon adopts a simple, but short-sighted, heuristic rule that bases current issuance on the issuance in the previous period, then the constant issuance policy is unstable. If however, the Hegemon uses a heuristic that targets the demand for risky assets from the rest of the world, then the corresponding equilibrium is stable. |
| Keywords: | International Monetary System; Reserve Currency; Safe Asset; Triffen Dilemma; Instability |
| JEL: | C61 F33 G15 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:edn:esedps:318 |