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on Open Economy Macroeconomics |
| By: | Stephanie Schmitt-Grohé; Martín Uribe |
| Abstract: | We estimate transitory and permanent import tariff shocks in the United States over the postwar period. We find that transitory tariff increases are neither inflationary nor contractionary, and are not associated with monetary tightening. In contrast, permanent tariff increases trigger a temporary rise in inflation (a one-off increase in the price level) and a brief tightening of monetary policy. Consistent with the intertemporal approach to the balance of payments, transitory tariff increases reduce imports and improve the trade balance, whereas permanent increases leave both largely unchanged. Transitory shocks account for approximately 80 percent of tariff movements. Overall, tariff shocks are estimated to be a minor driver of U.S. business cycle fluctuations on average and even during episodes of substantial tariff hikes, such as Nixon 1971, Ford 1975, and Trump 2018. |
| JEL: | E31 E52 F13 F41 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33997 |
| By: | Tamim Bayoumi (King's College); Joseph E. Gagnon (Peterson Institute for International Economics) |
| Abstract: | The United States has run significant external deficits for half a century and the associated net international liabilities have been growing, especially recently. Yet, in contrast to earlier periods when the deficit was rising, few economists have expressed concerns about external sustainability lately. This paper explores the drivers and risks associated with the deficits. The most persistent driver of US deficits is the attractiveness of US financial assets to foreign investors owing to the central role of the dollar in international transactions and to the perceived safety and creativity of US financial markets. Although it is likely that the US net liability position is overstated, it is clearly on an unsustainable path. President Donald Trump's tariff war is raising uncertainty and frightening investors, a combination that may indeed reduce the trade deficit by slowing US economic growth and depreciating the dollar. However, this strategy puts at risk the longstanding ability of the United States to finance external debt at low cost, increasing the burden on future generations. |
| Keywords: | Current account, exorbitant privilege, reserve currency, safe asset shortage, net international investment position |
| JEL: | F21 F32 F34 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:iie:wpaper:wp25-14 |
| By: | Stefan Avdjiev; Linda S. Goldberg |
| Abstract: | Global risk conditions, along with monetary policy in major advanced economies, have historically been major drivers of cross-border capital flows and the global financial cycle. So what happens to these flows when risk sentiment changes? In this post, we examine how the sensitivity to risk of global financial flows changed following the global financial crisis (GFC). We find that while the risk sensitivity of cross-border bank loans (CBL) was lower following the GFC, that of international debt securities (IDS) remained the same as before the GFC. Moreover, the changes in risk sensitivities of these flows were related to balance sheet constraints of financial institutions that were intermediating these flows. |
| Keywords: | global liquidity; international bank lending; international bond flows; emerging markets; advanced economies |
| JEL: | G10 G21 F34 |
| Date: | 2025–06–26 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:101162 |
| By: | Joseph Abadi; Jesús Fernández-Villaverde; Daniel R. Sanches |
| Abstract: | We present a micro-founded monetary model of the world economy to study international currency competition. Our model features both “unipolar” equilibria, with a single dominant international currency, and “multipolar” equilibria, in which multiple currencies circulate internationally. Governments can compete to internationalize their currencies by offering attractive interest rates on their sovereign debt. A large economy has a natural advantage in ensuring its currency becomes dominant, but if it lacks the fiscal capacity to absorb the global demand for liquid assets, the multipolar equilibrium emerges. |
| Keywords: | Dominant Currency; International Monetary System; Interest-Rate Policy; Fiscal Capacity |
| JEL: | E42 E58 G21 |
| Date: | 2025–06–26 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedpwp:101163 |
| By: | Marlon Salazar (Banco de la Rep´ublica de Colombia) |
| Abstract: | The current account (CA) balance indicates a country’s savings-investment position; sus-tained deficits require foreign capital. To monitor Colombia’s external vulnerability risk, we estimate a normative CA level using an unbalanced panel model based on long-run funda-mental structural variables. The difference between the observed CA and this normative level, termed the CA gap, signals potential macroeconomic imbalances and vulnerability, of-ten precipitating sharp adjustments. Our results emphasize Colombia’s oil balance as key to explaining this gap. We identify heightened vulnerability periods: 2010–2016 and 2021–2022. Recently (2023-2024), the gap narrowed due to monetary tightening, fiscal consolidation, re-silient service exports, and rising remittances. Finally, we show this framework can generate quarterly, real-time CA gap nowcasts for timely policy signals. |
| Keywords: | Current account imbalance; Normative current account; Current account gap; External vulnerability; Global imbalances |
| JEL: | F32 F41 |
| Date: | 2025–07–03 |
| URL: | https://d.repec.org/n?u=RePEc:gii:giihei:heidwp08-2025 |
| By: | Jeanne Bomare (Centre for the Analysis of Taxation, London School of Economics); Matthew Collin (EU Tax Observatory (Paris School of Economics) and NMBU) |
| Abstract: | Over the past decade, more than 100 jurisdictions have signed automatic exchange of financial information agreements (AEoI) in an effort to fight cross-border tax evasion. This paper studies the effectiveness and coverage of these agreements using account data leaked from an Isle of Man bank with a large customer base in countries participating to AEoI. We establish three sets of results. First, we find that the design of the governing AEoI agreement absolved the bank from reviewing and reporting a very large share (81%) of all the wealth owned by tax residents of AEoI participating countries, and instead the responsibility passed to smaller entities with weaker incentives to comply. Second, out of the wealth that fell under the bank’s reporting responsibility, foreign tax authorities only received reports covering 50% of what their tax residents held at the bank. We estimate that a further 32% went unreported due to loopholes in rule design. The rest of the accounts did not appear to have been reported, although through the information available in the leak we classified them as reportable. Third, we find evidence that bank clients who were more at risk of being reported on preemptively closed their accounts, potentially circumventing the AEoI reporting process. This paper provides new evidence on the potential limits of these agreements and how sophisticated individuals can ultimately avoid the AEoI transparency shock. |
| Keywords: | Tax Evasion, Information Exchange, Tax Enforcement |
| JEL: | H26 G21 F42 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:dbp:wpaper:033 |
| By: | Alonso Alfaro-Ureña (Economic Division, Central Bank of Costa Rica); Manuel Esteban Sánchez-Gómez (Economic Division, Central Bank of Costa Rica); Catalina Sandoval-Alvarado (Department of Economic Research, Central Bank of Costa Rica) |
| Abstract: | This paper describes the methodology and results of estimating the equilibrium real exchange rate (ERER) using the reduced-form approach known as the Behavioral Equilibrium Exchange Rate (BEER). The real exchange rate (RER) equation is estimated with quarterly data in the period between I-2007 and IV-2022, which coincides with the adoption of exchange rate flexibility regimes in Costa Rica. The results indicate that the path of the ERER is explained by the evolution of its fundamentals: labor productivity, government expenditure, international investment position, terms of trade, and the difference among local and external interest rates. Improvements in labor productivity, increases in Government spending and increases in the spread of local and external interest rates are correlated with downward movements in the equilibrium path of the RER (real appreciations). On the other hand, the more negative result in the international investment position and a fall in terms of trade explains movements towards real depreciations. During the period of analysis, there is no evidence of RER deviations from its equilibrium level beyond the coherence zone determined. Therefore, variations on the ERER trajectory are consistent with the behavior of its fundamentals. |
| Keywords: | Real Exchange Rate, Fundamental Determinants, Exchange Rate Flexibility |
| JEL: | F31 F33 C32 |
| Date: | 2024–02 |
| URL: | https://d.repec.org/n?u=RePEc:apk:nottec:2402 |
| By: | Yuki Murakami (Graduate School of Economics, Waseda University) |
| Abstract: | This paper focuses on the time-varying volatility of aggregate fluctuations in emerging markets. Both Latin American and Asian emerging economies experience volatility spikes during financial crises; however, only the latter group exhibits a long-run decline in volatility. Using business cycle data from South Korea, we estimate a small open economy real business cycle model with Markov-switching shock variances. We compare the model fit across alternative specifications of shock volatility structures and investigate the underlying drivers of volatility changes. The results indicate that the data favor the model in which all shock variances switch regimes synchronously. The estimated model captures both the declining trend in volatility over time and temporary volatility spikes during episodes of financial turmoil. It suggests that the long-run decline in volatility is not primarily driven by a reduction in the variance of the interest rate premium shock, though this shock contributes to temporary volatility spikes during crises. The model replicates key business cycle features of emerging markets and highlights that the drivers of aggregate fluctuations depend on the volatility regime. |
| Keywords: | Small open economy; real business cycles; regime switching |
| JEL: | E32 F41 C13 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:wap:wpaper:2514 |
| By: | Laura Alfaro; Maria Brussevich; Camelia Minoiu; Andrea F. Presbitero |
| Abstract: | Finding new international suppliers is costly, so most importers source inputs from a single country. We examine the role of banks in mitigating trade search costs during the 2018–19 US-China trade tensions. We match data on shipments to US ports with the US credit register to analyze trade and bank credit relationships at the bank-firm level. We show that importers of tariff-hit products from China were more likely to exit relationships with Chinese suppliers and find new suppliers in other Asian countries. To finance their geographic diversification, tariff-hit firms increased credit demand, drawing on bank credit lines and taking out loans at higher rates. Banks offering specialized trade finance services to Asian markets eased both financial and information frictions. Tariff-hit firms with specialized banks borrowed at lower rates and were 15 percentage points more likely and three months faster to establish new supplier relationships than firms with other banks. We estimate the cost of searching for suppliers at $1.9 million (or 5 percent of annual sales revenue) for the average US importer. |
| Keywords: | financial frictions; bank lending; supply chains; trade policy |
| JEL: | G21 F34 F42 |
| Date: | 2025–05–19 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedawp:101193 |
| By: | Yao Amber Li; Lingfei Lu; Shang-Jin Wei; Jingbo Yao |
| Abstract: | We find that an unanticipated tightening of US monetary policy tends to raise US import prices. This empirical “spill-back” pattern differs from the predictions of typical open-economy macro models. We also document a new empirical "spillover" effect: import prices of other countries also rise following an unexpected US monetary tightening. To understand the mechanism, we examine Chinese exporters and identify a borrowing cost channel—their liquidity conditions generally deteriorate after a US monetary tightening. Indeed, the output price response is greater for those firms facing higher borrowing costs or tighter liquidity conditions. |
| JEL: | E3 E5 F14 F40 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33811 |
| By: | Miriam Koomen; Laurence Wicht |
| Abstract: | We present new empirical evidence on the role of granularity in the current account (CA), using a unique and comprehensive firm-level dataset for Switzerland. We show that idiosyncratic shocks to large firms account for almost two thirds of the fluctuations in the headline CA and are the primary source of CA volatility. The granular effect is present across goods, services, and income components and persists over both short- and medium-term horizons. In addition to their direct impact, idiosyncratic shocks propagate through inter-firm linkages via input-output relationships and cross-product connections associated with multinational enterprise activity. Our findings challenge standard macroeconomic models that emphasize aggregate fundamentals, highlighting the importance of firm-level heterogeneity in explaining external imbalances and their fluctuations. |
| Keywords: | Current account, Firm-level shocks, Granular fluctuations, Large firms |
| JEL: | F32 F23 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:snb:snbwpa:2025-08 |