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on Open Economy Macroeconomics |
| By: | Itskhoki, Oleg; Mukhin, Dmitry |
| Abstract: | We use a general open-economy wedge-accounting framework to characterize the set of shocks that can account for major exchange rate puzzles. Focusing on a near-autarky behavior of the economy, we show analytically that all standard macro economic shocks—including productivity, monetary, government spending, and markup shocks—are inconsistent with the broad properties of the macro exchange rate disconnect. News shocks about future macro economic fundamentals can generate plausible exchange rate properties. However, they show up prominently in contemporaneous asset prices, which violates the finance exchange rate disconnect. International shocks to trade costs, terms of trade and import demand, while potentially consistent with disconnect, do not robustly generate the empirical Backus–Smith, UIP and terms-of-trade properties. In contrast, the observed exchange rate behavior is consistent with risk-sharing (financial) shocks that arise from shifts in demand of foreign investors for home-currency assets, or vice versa. |
| JEL: | F31 F41 |
| Date: | 2024–06–25 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:123704 |
| By: | Tsvetelina Nenova; Andreas Schrimpf; Hyun Song Shin |
| Abstract: | We show that outstanding volumes in FX swaps serve as a good indicator for the hedging activity associated with portfolio positions of advanced economy bond investors. As such, FX swaps serve as a key barometer of risk-taking and global financial conditions. We develop a simple portfolio choice model for international bond investors and use it to estimate the relationship between global FX hedging activity, relative investment opportunities (captured by the yield curve slopes in respective economies), and the hedging costs associated with underlying investments. We find that higher FX hedging activity is closely associated with US portfolio debt inflows and outflows, indicating that FX hedging plays a crucial role in facilitating cross-border bond investments. This connection between FX hedging motives, portfolio bond flows, and the yield curve highlights a mechanism of international financial spillovers - not only from the US but also from advanced economies with significant accumulated wealth flowing into the US. |
| Keywords: | global portfolio investments, FX hedging, financial conditions |
| JEL: | F31 F32 F42 G15 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1273 |
| By: | Hyun Song Shin; Philip Wooldridge; Dora Xia |
| Abstract: | Currency hedging by non-US investors holding US dollar securities appears to have made an important contribution to the weakness of the dollar in April and May 2025. In recent years, the strength of the dollar and high currency hedging costs driven by elevated short-term dollar interest rates had discouraged non-US investors from hedging their US dollar exposures. Clues as to the location of currency hedging activity can be gleaned from intraday exchange rate movements. In April, the largest declines in the US dollar occurred during Asian trading hours, suggesting an important role for Asian investors. |
| Date: | 2025–06–20 |
| URL: | https://d.repec.org/n?u=RePEc:bis:bisblt:105 |
| By: | Juvonen, Petteri; Nelimarkka, Jaakko; Obstbaum, Meri; Vilmi, Lauri |
| Abstract: | We study recent inflation and labour market dynamics in the euro area within a general equilibrium framework. Rapid inflation was mainly caused by demand and supply shocks, but labor market-specific shocks also contributed to the surge in inflation. Our results underscore the significance of import price shocks in explaining the recent interactions between wages and prices. The observed exceptional labour market tightness has also been influenced by a decline in hours worked per person, alongside more commonly studied demand and supply shocks. |
| Keywords: | euro area, labour market shocks, inflation, labour market tightness |
| JEL: | E31 E32 E37 F41 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofecr:319705 |
| By: | Forbes, Kristin; Ha, Jongrim; Kose, M. Ayhan |
| Abstract: | Central banks often face tradeoffs in how their monetary policy decisions impact economic activity (including employment), inflation and the price level. This paper assesses how these tradeoffs have evolved over time and varied across countries, with a focus on understanding the post-pandemic adjustment. To make these comparisons, we compile a cross-country, historical database of “rate cycles” (i.e., easing and tightening phases for monetary policy) for 24 advanced economies from 1970 through 2024. This allows us to quantify the characteristics of interest rate adjustments and corresponding macroeconomic outcomes and tradeoffs. We also calculate Sacrifice Ratios (output losses per inflation reduction) and document a historically low “sacrifice” during the post-pandemic tightening. This popular measure, however, ignores adjustments in the price level—which increased by more after the pandemic than over the past four decades. A series of regressions and simulations suggest monetary policy (and particularly the timing and aggressiveness of rate hikes) play a meaningful role in explaining these tradeoffs and how adjustments occur during tightening phases. Central bank credibility is the one measure we assess that corresponds to only positive outcomes and no difficult tradeoffs. |
| Keywords: | monetary policy, interest rates, central bank, Sacrifice Ratio, business fluctuations, prices, employment |
| JEL: | E31 E32 E43 E52 E58 F33 F44 N10 |
| Date: | 2025–05–13 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:124747 |
| By: | Mr. Eugenio M Cerutti; Melih Firat; Martina Hengge |
| Abstract: | Cross-border payments are essential to the global financial system, facilitating trade and investment. The global cross-border traditional and crypto payment market approached a value of about one quadrillion dollars in 2024, with crypto payments representing only a small fraction despite their recent surge. Focusing on data from Swift—the largest traditional cross-border financial messaging network—we study the characteristics and evolving patterns of these payments over 2021-24. Notably, payments are predominantly concentrated in advanced economies, and are driven by financial institutions and large transactions. While currency usage remains stable—with the U.S. dollar maintaining the largest share—the Chinese renminbi demonstrates signs of increasing global integration, albeit from a low base. Gravity model estimates confirm that traditional economic linkages, via trade, portfolio investment, and FDI, shape cross-border payments. However, aggregate dynamics mask substantial heterogeneity across message types (customer vs. financial related payments), currencies, and transaction sizes, with information asymmetries playing a diminished role in larger payments. |
| Keywords: | Cross-Border Payments; Trade; FDI; Portfolio Investment; Networks |
| Date: | 2025–06–13 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/120 |
| By: | Arce, Fernando; Morgan, Jan; Werquin, Nicolas |
| Abstract: | Political crises often coincide with fiscal crises, with complex causal dynamics at play. We examine the interaction between tax revolts and sovereign risk using a quantitative structural model calibrated to Argentina. In the model, the government can be controlled by political parties with different preferences for redistribution. Households may opt to revolt in response to the fiscal decisions of the ruler. While revolts entail economic costs, they also increase the likelihood of political turnover. Our model mirrors the data by generating political crises concurrent with fiscal turmoil. Specifically, we find that our model aligns closely with the conditions observed during the Macri administration (2015-2019). We find that left-leaning parties are more prone to default upon entering office, while right-leaning parties issue more debt. Our framework explains the high deficits observed during the Macri administration as well as the sovereign default that occurred immediately after the left regained power. |
| Keywords: | Civil unrest;Financial Crises;sovereign default;redistribution |
| JEL: | E32 E44 F41 G01 G28 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:14144 |
| By: | Boehnert, Lukas (University of Oxford); de Ferra, Sergio (University of Oxford); Mitman, Kurt (Stockholm University); Romei, Federica (University of Oxford) |
| Abstract: | We investigate how the composition of expenditure shapes the transmission of monetary policy in a currency union. European Monetary Union data reveal three facts: (1) higher inequality countries have larger service expenditure shares; (2) monetary policy has a weaker output impact in these high-service-share, high-inequality countries; and (3) monetary policy induces systematic trade flows between high- and low-service-share countries. We develop a New Keynesian model with non-homothetic preferences and heterogeneous sectoral income that rationalizes these facts. Pro-cyclical inequality, driven by wealthier households' greater income exposure to services, buffers poorer households' consumption to contractionary shocks, dampening overall policy transmission. Our findings suggest that accounting for cross-country differences in consumption and income distributions is essential for understanding common monetary policy. |
| Keywords: | currency union, monetary policy, inequality |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17950 |
| By: | Mr. Abdoul A Wane; Carlos de Resende; Jing Xie |
| Abstract: | This paper employs various empirical methods to test the Purchasing Power Parity (PPP) hypothesis in West and Central Africa, considering countries within the WAEMU, CEMAC, CFA, and ECOWAS currency zones and four possible numeraire currencies—U.S. dollar, euro, renminbi, and the CFA franc. Using panel and single-country unit-root, cointegration, error-correction techniques, our findings indicate that the numeraire currency matters for evidence in favor of PPP. Results show slightly stronger evidence when the euro is used as the reference compared to other numeraire currencies, although results vary across different methods. Evidence for PPP is also stronger across the currency zones after the 1994 devaluation of the CFA franc, when evidence for PPP using the renminbi as reference is also stronger, suggesting an increasing importance of the renminbi for the economies in West and Central Africa. The paper documents significant differences in price dynamics for the CEMAC and the WAEMU, the two components of the CFA zone, with stronger evidence for PPP found for the WAEMU and reversal speed to PPP faster than the 2-3 years found in the literature. Results also indicate that real exchange rates of the currency zones revert to PPP mainly through adjustments of foreign prices expressed in domestic currencies—which may result from changes in nominal exchange rates of the reference currencies or foreign prices—and less so via adjustments in domestic prices. |
| Keywords: | Purchasing Power Parity; Real Exchange Rate; CFA zone; price level; inflation; numeraire currency |
| Date: | 2025–06–13 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/119 |
| By: | Warwick J. McKibbin (Peterson Institute for International Economics); Marcus Noland (Peterson Institute for International Economics); Geoffrey Shuetrim (McKibbin Software Group Pty Ltd.) |
| Abstract: | This paper explores the implications of President Donald Trump's so-called Liberation Day tariffs on the US and global economies under five alternative scenarios. As he continues to change his tariffs daily, the paper starts with a snapshot of two plausible, core, tariff scenarios based on his recent comments—one with high tariffs and one with low tariffs. The paper then considers two more scenarios in which other economies retaliate to the high or low US tariffs by imposing matching tariffs on US exports. The fifth scenario includes high US tariffs with retaliation plus a rise in the risk of holding US assets. This increase in risk causes a depreciation of the US dollar similar in scale to the shifts seen in the week following the Liberation Day tariffs announcement on April 2, 2025. The paper starts by exploring the details of the changes made to the original tariff announcements from April 2 to May 10. This is particularly important for understanding the tariffs on Canada and Mexico, which were substantially reduced during the period through exemptions under the United States-Mexico-Canada Agreement (USMCA). The authors find the tariffs significantly reduce US and global economic growth and increase inflation in many economies, depending on how countries respond. However, the outcomes are less severe than the original April 2 announcements implied. Many exemptions and tariff adjustments have been made since then for particular goods and countries. Retaliation by other countries worsens the economic losses, and inflation increases. The tariffs disproportionately hurt the US agriculture and durable manufacturing sectors by reducing output and employment and increasing prices. Finally, in the fifth scenario, the falling dollar and higher longer-term interest rates accentuate US losses in employment and income as foreign capital flows away from the United States to other countries. A more complete set of results for most countries and regions can be found in the online dashboard (https://documentation.gcubed.com/gcubed/version/6G/scenarios/McKibbin_Noland_Shuetrim_2025a/). The Peterson Institute for International Economics has no partisan goal in publishing this research. Our objective is to educate policymakers and the public about the effects these policies would have on Americans and other people around the world. |
| JEL: | F13 F47 C69 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:iie:wpaper:wp25-13 |
| By: | Takahashi, Yuta (Hitotsubashi University); Takayama, Naoki (Hitotsubashi University) |
| Abstract: | In the last two decades, economic growth has slowed down across developed countries. This paper investigates the role of technology specific to durable consumption and equipment goods in this global slowdown. We present evidence that technological stagnation in these sectors has prevailed globally over the past two decades. Using an extended Ramsey growth model as an accounting device, we find that this global technology stagnation can substantially account for the economic slowdown across developed countries through the capital deepening effect, rather than TFP. |
| Date: | 2025–06–12 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:ek5t6_v1 |