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on Open Economy Macroeconomics |
| By: | Iván Werning; Guido Lorenzoni; Veronica Guerrieri |
| Abstract: | We study the optimal monetary policy response to the imposition of tariffs in a model with imported intermediate inputs. In a simple open-economy framework, we show that a tariff maps exactly into a cost-push shock in the standard closed-economy New Keynesian model, shifting the Phillips curve upward. We then characterize optimal monetary policy, showing that it partially accommodates the shock to smooth the transition to a more distorted long-run equilibrium—at the cost of higher short-run inflation. |
| JEL: | E5 E6 F4 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33772 |
| By: | Veronica Guerrieri; Guido Lorenzoni; Iván Werning |
| Abstract: | Individual central banks respond to global supply shocks that transmit inflationary pressures—such as oil prices, shipping costs, and bottlenecks in global supply chains—taking these conditions as given. However, their combined global response determines global demand and, thus, the resulting global price pressure. This paper builds a simple monetary open economy model to explore the economic implications of this channel. We show that, following a negative world supply shock, uncoordinated monetary policy may be excessively loose. Our mechanism for this “expansionary bias” applies to an aggregate shock in a symmetric world economy of small open economies having no individual control over their terms of trade. In these ways, it is distinct from asymmetric shocks and terms-of-trade manipulation motives emphasized in the monetary coordination literature. |
| JEL: | E12 E58 F42 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33840 |
| By: | Mohammad Mahabub Alam |
| Abstract: | In recent years, Bangladesh has implemented a deficit-biased fiscal policy backed by robust GDP growth and relatively low interest rates, taking advantage of its access to concessional financing. However, gradual integration with the global economy has exposed the country to external macroeconomic shocks. This paper employs a Structural Vector Autoregression (SVAR) model with short-run restrictions to identify three external shocks: an increase in foreign interest rates, a rise in commodity prices, and an exchange rate appreciation. It examines the impact of these shocks on Bangladesh's economy through impulse response functions using annual data from 1983 to 2023. The results show that commodity price inflation and exchange rate appreciation worsen the government’s fiscal balance, while higher foreign interest rates primarily raise domestic interest rates, with an insignificant impact on fiscal balance. Additionally, by employing a standard VAR model with macroeconomic variables that directly influence the government’s debt dynamics, this paper projects government debt over the 2024-2028 period in a stochastic framework. The projection shows that the government’s median debt remains at 37.1% of GDP by the end of 2028, with a 30.1% probability that the debt level exceeds 40% of GDP. Two alternative scenarios: i) a 2% rise in the foreign interest rates and ii) a 10% depreciation of the real exchange rate above the baseline, raise this probability to 38.7% and 56.2%, respectively. |
| Keywords: | external shocks, macroeconomic uncertainty, public debt, SVAR, Bangladesh |
| JEL: | H63 H68 C51 C53 E62 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-33 |
| By: | Adrián Fernandez-Perez (Michael Smurfit Graduate Business School, University College Dublin, Ireland.); Marta Gómez-Puig (Department of Economics and Riskcenter, Universitat de Barcelona, Spain.); Simón Sosvilla-Rivero (Complutense Institute for Economic Analysis, Universidad Complutense de Madrid, Spain.) |
| Abstract: | The sovereign debt crisis in the euro area revealed that European Monetary Union (EMU) government bond markets interact in a highly synchronised network and that risk particular to a country or sovereign bond yield component cannot be appropriately evaluated in isolation without taking potential risk transmission effects from other countries or sovereign bond yield components into consideration. Therefore, in clear contrast with the empirical evidence based on Granger-causality tests, the main contribution of the paper comes from the analysis of the transmission of credit and liquidity risk by examining a broad network of relations between the two risks in nine EMU sovereign debt markets from 2008 to 2018, explicitly examining the net pairwise connectedness among all the possible pairs formed from the 18 sovereign risk indicators. The results of this analysis indicate that, on average, risk transmission goes mostly from credit to liquidity risk (both within and across countries). This finding is crucial for policymakers because it indicates that rising credit risk is the primary driver of yield spread increases, and actions to strengthen the budgetary position of euro-area economies are essential. Finally, our results indicate that sovereign risk transmission is time-varying. Although both liquidity and credit risk were transmitted across countries during the Global Financial Crisis, we mainly observed the transmission of liquidity risk across them during the European sovereign debt crisis, suggesting that investors prefer sovereign debt that is easier to trade when market liquidity dries up. |
| Keywords: | Liquidity; Credit risk; EMU sovereign bonds; MTS bond market; Dynamic connectedness; Time-varying parameters. JEL classification: C22, C53, G12, G14, G15. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:ira:wpaper:202504 |
| By: | Ally Manengu Manengu (UNIKIN - Département des Sciences économiques, Université de Kinshasa) |
| Abstract: | This study takes part in the debate about nature of the relationship between exchange rate fluctuations and inflation. The goal is to demonstrate that the exchange rate evolves in a volatile manner, and that its effects on inflation are positive and non-linear for the case of the Democratic Republic of Congo (DRC), with annual data for the period from 1970 to 2022. Two econometric models are fitted for this purpose : (i) the Generalized Autoregressive Conditional Heteroscedasticity (GARCH) model, which was developed by Robert Engle, F., (1986); (ii) the Nonlinear Staggered Lag Autoregressive (NARDL) model, which was developed by Shin, Y.; Yu, B. C., and Greenwood-Nimmo, M. (2014). The results obtained from the estimations attest to the following : (i) the exchange rate in the DRC evolves in a volatile manner ; (ii) in the short term, the effects of exchange rate volatility on inflation are positive and non-linear, while they are linear in the long term. Positive shocks have an inflationary effect ; while negative shocks have a negative and statistically insignificant effect (prices are rigid to exchange rate depreciation in the DRC). |
| Abstract: | Cette étude participe au débat sur la nature de la relation entre les fluctuations du taux de change et l'inflation. L'objectif est de démontrer que le taux de change évolue de manière volatile, et que ses effets sur l'inflation sont positifs et non-linéaires pour le cas de la République Démocratique du Congo (RDC), avec les données annuelles pour la période allant de 1970 à 2022. A cet effet, deux modèles économétriques ont été construits : (i) le modèle d'Hétéroscédasticité Conditionnelle Autorégressive Généralisée (GARCH), qui a été développé par Robert Engle, F., (1986) ; (ii) le modèle autorégressif à retard échelonné non-linéaire (NARDL), qui a été développé par Shin, Y. ; Yu, B. C., et Greenwood-Nimmo, M. ( 2014). Les résultats obtenus des estimations attestent ce qui suit : (i) le taux de change en RDC évolue de manière volatile ; (ii) à court terme, les effets de la volatilité du taux de change sur l'inflation sont positifs et non-linéaires, tandis qu'ils sont linéaires à long terme. Les chocs positifs ont un effet inflationniste, alors que les chocs négatifs ont un effet négatif et statistiquement non significatif (les prix sont rigides à la baisse du taux de change en RDC). |
| Keywords: | Taux de change Inflation volatilité et GARCH effets non-linéaires et NARDL. Classification JEL : E31 F41 E44 et C52 C53 C22 Exchange rate Inflation volatility and GARCH non-linear effects and NARDL. JEL code : E31 F41 E44 and C52 C53 C22, Taux de change, Inflation, volatilité et GARCH, effets non-linéaires et NARDL. Classification JEL : E31, F41, E44 et C52, C53, C22 Exchange rate, volatility and GARCH, non-linear effects and NARDL. JEL code : E31, E44 and C52, C22 |
| Date: | 2025–05–25 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05083768 |
| By: | Sondang Marsinta Uli Panggabean; Mahjus Ekananda; Beta Yulianita Gitaharie; Leslie Djuranovik |
| Abstract: | We examine the impact of mandatory export proceeds repatriation on exchange rate stability in three emerging markets, Iran, Sri Lanka, and Turkey, using the Generalized Synthetic Control framework. By modeling exchange rate stochastic volatility as our outcome of interest and controlling for interest rate differentials, exchange rate regime shifts, and inflation rate gaps, we address both unobserved time-varying confounders and heterogeneous treatment effects. Our estimates reveal no statistically significant impact of repatriation mandates on exchange-rate volatility across the three countries. We also find that we cannot reject the possibility of a non-zero impact. These results remain robust to an extensive range of sensitivity analyses, including alternative covariate specifications and placebo tests, thereby confirming their reliability. |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2506.09168 |
| By: | Jorge M. Uribe (School of Economics & Riskcenter, Universitat de Barcelona, Spain.); Oscar Valencia (Fiscal Management Division, Inter-American Development Bank, Washington (USA)) |
| Keywords: | Fiscal Crisis, Early Warning Systems, Inflation Targeting, Fiscal Rules, Openness, Machine Learning. JEL classification: E63, H87, O23, G01, H12. |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:ira:wpaper:202416 |