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on Open Economy Macroeconomics |
| By: | Michael B. Devereux; Rui Lu; Kang Shi; Juanyi (Jenny) Xu |
| Abstract: | This paper proposes a concept of a global currency and introduces a “global currency pricing” specification into a standard N-country open economy macroeconomic model. A global currency is defined as a virtual unit of account that is exclusively used for international trade invoicing and is formed as a basket of individual currencies, similar to the existing SDR. We show there is a unique optimal composition of a global currency that weights currencies according to their importance in international trade. A striking implication is that under this global currency design, the monetary policy of each country should be concerned solely with domestic shocks. No country should have more than a 50 percent weight in an optimal global currency, and a situation where a large country has the sole weighting in the global currency is likely to be worst outcome from a perspective of global welfare. We derive the conditions under which global currency pricing (GCP) dominates all other outcomes, and is an optimal choice of invoicing currency for individual firms. |
| JEL: | F30 F40 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33540 |
| By: | Ṣebnem Kalemli-Özcan; Can Soylu; Muhammed A. Yildirim |
| Abstract: | We develop a novel framework to study the interaction between monetary policy and trade. Our New Keynesian open economy model incorporates international production networks, sectoral heterogeneity in price rigidities, and trade distortions. We decompose the general equilibrium response to trade shocks into distinct channels that account for demand shifts, policy effects, exchange rate adjustments, expectations, price stickiness, and input–output linkages. Tariffs act simultaneously as demand and supply shocks, leading to endogenous fragmentation through changes in trade and production network linkages. We show that the net impact of tariffs on domestic inflation, output, employment, and the dollar depends on the endogenous monetary policy response in both the tariff-imposing and tariff-exposed countries, within a global general equilibrium framework. Our quantitative exercise replicates the observed effects of the 2018 tariffs on the U.S. economy and predicts a 1.6 pp decline in U.S. output, a 0.8 pp rise in inflation, and a 4.8% appreciation of the dollar in response to a retaliatory trade war linked to tariffs announced on “Liberation Day.” Tariff threats, even in the absence of actual implementation, are self-defeating—leading to a 4.1% appreciation of the dollar, 0.6% deflation, and a 0.7 pp decline in output, as agents re-optimize in anticipation of future distortions. Dollar appreciates less or even can depreciate under retaliation, tariff threats, and increased global uncertainty. |
| JEL: | E0 F40 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33686 |
| By: | Stefan Avdjiev; Leonardo Gambacorta; Linda S. Goldberg; Stefano Schiaffi |
| Abstract: | The period after the Global Financial Crisis (GFC) was characterized by a considerable risk migration within global liquidity flows, away from cross-border bank lending towards international bond issuance. We show that the post-GFC shifts in the risk sensitivities of global liquidity flows are related to the tightness of the balance sheet (capital and leverage) constraints faced by international (bank and non-bank) lenders and to the migration of borrowers across funding sources. We document that the risk sensitivity of global liquidity flows is higher when funding is provided by financial intermediaries that are facing greater balance sheet constraints. We also provide evidence that the post-GFC migration of borrowers from cross-border loans to international debt securities was associated with a decline in the risk sensitivity of global liquidity flows to EME borrowers. |
| JEL: | F30 F34 F42 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33674 |
| By: | James Morley; Benjamin Wong |
| Abstract: | We study the relevance of global shocks in determining r-star for a set of typically studied advanced open economies (Australia, Canada, Euro Area, New Zealand, Norway, Sweden, and the United Kingdom). To do so, we build on the multivariate Beveridge-Nelson decomposition to account for open economy features by developing an empirical two-block open economy model and also embedding restrictions used in the open economy literature to identify the role of foreign shocks. We document three key findings: (i) shocks driving r-star for the United States are almost entirely sufficient to understand the role of the global r-star for these open economies; (ii) local shocks are also important in determining domestic r-stars, leaving open the potential that domestic economic policies can complement or offset the global forces determining r-star; and (iii) even though local shocks are important, global forces played the leading role in the long-term decline in r-stars for all seven open economies since the global financial crisis. |
| Keywords: | global r-star, Beveridge-Nelson decomposition, block exogeneity, foreign shocks |
| JEL: | C32 E52 F41 F43 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-24 |
| By: | Karsten Müller; Chenzi Xu; Mohamed Lehbib; Ziliang Chen |
| Abstract: | The Global Macro Database is an open-source, continuously updated dataset of macroeconomic statistics that unifies and extends existing resources. By harmonizing and integrating data from 32 major contemporary sources—including the IMF, World Bank, and OECD—with historical records from 78 additional datasets, we construct comprehensive annual time series for 46 variables across 243 countries. This database covers global macroeconomic trends from the origins of modern data collection to projected estimates for 2030. Using this extensive database, we study the long-run output losses of financial crises and global temperature shocks, two applications in which historical time series are a crucial input. Our findings show that financial crises are associated with statistically detectable contractions in real GDP for five decades into the future, which are considerably larger than previously estimated. Temperature shocks also predict real GDP contractions up to 30 years ahead, especially in emerging economies. |
| JEL: | E01 F01 N01 N10 O10 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33714 |
| By: | Fabien Rondeau (Crem - Centre de Recherche sur les Médiations - UL - Université de Lorraine); Yushi Yoshida (University of Shiga Prefecture) |
| Abstract: | With internationally fragmented processes of production via global value chains, value-added components of a country's export include the importer's contributions as well as that of exporters. The exchange rate sensitivity of export price reflects these value-added components. We examine the effect of value-added contributions of exporters and importers on the degree of exchange rate pass-through by focusing on the Japanese import prices by industries. Our results show that exchange rate pass-through increases for industries with a higher contribution of exporting countries' value added and for industries with a lower contribution of the importing country's value added. The differentials in value added among industries help explain the dynamics of exchange rate pass-through at the industry level. |
| Keywords: | Exchange rate pass-through, Global value chains, Value added in trade |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05035175 |
| By: | António Afonso; José Alves; Tovar João Jalles; Sofia Monteiro; João Tovar Jalles |
| Abstract: | This paper examines the impact of natural disasters on fiscal and external sustainability across 134 economies from 1980 to 2023. We adopt a two-step approach: first, we estimate country-specific, time-varying sustainability coefficients; second, we assess their determinants using Weighted Least Squares panel regressions with fixed effects. To complement the long-run analysis, we employ local projections to capture the short-term dynamics following disaster-related mortality, vulnerability, and resilience shocks. Results show that natural disasters weaken fiscal sustainability, particularly in emerging and vulnerable economies. Vulnerability exacerbates fiscal and external fragility, while resilience mitigates adverse effects on public accounts. Local projections reveal that fiscal sustainability deteriorates significantly in the medium term after disaster shocks, whereas external sustainability responses are more muted and heterogeneous. Together, these findings highlight the importance of combining long- and short-run approaches to understand how climate shocks propagate through macroeconomic channels and to inform adaptive, risk-sensitive fiscal policy frameworks. |
| Keywords: | fiscal sustainability, external sustainability, climate risk, natural disasters, local projections, weighted least squares. |
| JEL: | E62 F32 H63 O23 Q54 C33 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11818 |
| By: | Grégory Donnat (Université Côte d'Azur, CNRS, GREDEG, France) |
| Abstract: | Developing countries implement policies to maintain a stable exchange rate, with export-led growth strategies to spur economic growth and stability. The real exchange rate is a key factor of external competitiveness but can also cause economic and financial disruptions. These countries are dependent on external financing which impacts the real exchange rate movements over the medium and long run. We empirically explore the response of the real exchange rate to external public indebtedness in developing countries, from 1975 to 2017, using the iterative Bayesian shrinkage procedure to handle the cross-country differences in panel data. The contribution to the literature is twofold. First, we find that the change in the real exchange rate depends on the external public indebtedness in an inverted U-shape relationship in developing countries. Second, we determine an external debt threshold that minimizes changes in the real exchange rate for each country. |
| Keywords: | Real Exchange Rate, External Debt, Developing Countries, Heterogeneity |
| JEL: | F31 F34 O16 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:gre:wpaper:2025-15 |
| By: | David Baqaee; Hannes Malmberg |
| Abstract: | This short note shows that accounting for capital adjustment is critical when analyzing the long-run effects of trade wars on real wages and consumption. The reason is that trade wars increase the relative price between investment goods and labor by taxing imported investment goods and their inputs. This price shift depresses capital demand, shrinks the long-run capital stock, and pushes down consumption and real wages compared to scenarios when capital is fixed. We illustrate this mechanism by studying recent US tariffs using a dynamic quantitative trade model. When the capital stock is allowed to adjust, long-run consumption and wage responses are both larger and more negative. With capital adjustment, U.S. consumption can fall by 2.6%, compared to 0.6% when capital is held fixed, as in a static model. That is, capital stock adjustment emerges as a dominant driver of long-run outcomes, more important than the standard mechanisms from static trade models — terms-of-trade effects and misallocation of production across countries. |
| JEL: | F0 F1 F30 F40 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33702 |
| By: | SeungJae Hwang |
| Abstract: | This paper examines the empirical failure of uncovered interest parity (UIP) and proposes a structural explanation based on a mean-reverting risk premium. We define a realized premium as the deviation between observed exchange rate returns and the interest rate differential, and demonstrate its strong mean-reverting behavior across multiple horizons. Motivated by this pattern, we model the risk premium using an Ornstein-Uhlenbeck (OU) process embedded within a stochastic differential equation for the exchange rate. Our model yields closed-form approximations for future exchange rate distributions, which we evaluate using coverage-based backtesting. Applied to USD/KRW data from 2010 to 2025, the model shows strong predictive performance at both short-term and long-term horizons, while underperforming at intermediate (3-month) horizons and showing conservative behavior in the tails of long-term forecasts. These results suggest that exchange rate deviations from UIP may reflect structured, forecastable dynamics rather than pure noise, and point to future modeling improvements via regime-switching or time-varying volatility. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.06028 |