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on Open Economy Macroeconomics |
| By: | Marina Azzimonti; Vincenzo Quadrini |
| Abstract: | The rise of the Digital Economy has the potential to reshape international financial markets and the role of traditional reserve assets such as the US dollar. While the creation of Stablecoins may increase the demand for safe dollar-denominated instruments due to reserve backing requirements, they may also serve as substitutes, reducing the global demand for traditional reserve assets. We develop a multicountry model featuring the US, the rest of the world, and a distinct Digital Economy to quantify the impact of the potential expansion of the digital economy. Our results show that, in the long run, the reserve demand effect dominates the substitution effect, leading to lower US interest rates and greater US foreign borrowing. We also find that the expansion of the Digital Economy increases idiosyncratic consumption volatility in the US, while reducing it in the rest of the world. |
| JEL: | F30 F40 G51 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34066 |
| By: | Bahmani-Oskooee, Mohsen; Halicioglu, Ferda |
| Abstract: | A new strand of literature in international economics is now in the early stages of development, i.e., the impact of exchange rate changes on service trade. We add to this literature by considering the link between the Turkish lira's real effective exchange rate and its trade in services. Since nonlinear adjustment of the exchange rate has proven to yield more significant outcomes relative to linear adjustment, we estimate a nonlinear model (assuming the effects are asymmetric) in addition to a linear model (which assumes the effects are symmetric). When we first estimated the models using Turkish aggregate trade in services, we could only find some short-run effects. However, we disaggregated the data into eight service categories to reduce aggregation bias. We then found short-run significant effects in all eight service industries. Short-run effects lasted into long-run effects in six industries. The unaffected industries were construction and transport. |
| Keywords: | Trade in Services, Real Effective Exchange Rate, Asymmetric Analysis, Turkey |
| JEL: | C22 F14 G20 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125454 |
| By: | Egan, Paul; Roche, Fionn |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:esr:wpaper:wp798 |
| By: | Felipe Saffie; Liliana Varela; Kei-Mu Yi |
| Abstract: | We study empirically and theoretically the effects of international financial flows on resource allocation. Using the universe of firms in Hungary, we show that removing capital controls lowers firms’ cost of capital and increases household consumption, with the latter playing a dominant role. The consumption channel leads to reallocation of resources toward high expenditure elasticity activities—such as services—promoting both the expansion of incumbents and firm entry. A multi-sector heterogeneous firm model replicates these dynamics. Our model shows that non-homotheticity in consumption can quantitatively account for the reallocation of resources towards services and successfully replicates the dynamics of aggregate productivity following episodes of financial openness. |
| Keywords: | firm dynamics; financial liberalization; reallocation; capital flows; TFP; non-homothetic preferences |
| JEL: | F15 F41 F43 F63 |
| Date: | 2025–08–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:101404 |
| By: | Miguel Acosta-Henao (CENTRAL BANK OF CHILE); María Alejandra Amado (BANCO DE ESPAÑA); Montserrat Martí (CENTRAL BANK OF CHILE); David Pérez-Reyna (UNIVERSIDAD DE LOS ANDES) |
| Abstract: | This paper investigates the granular transmission of U.S. monetary policy shocks to deviations from the uncovered interest rate parity (UIPDs) in emerging economies. Using a comprehensive dataset from Chile that accounts for firm-bank relationships and the time-variant characteristics of both firms and banks, we uncover several key findings: (1) Shocks to the federal funds rate (FFR) increase banks’ costs of foreign borrowing. (2) These higher credit costs disproportionately affect small firms, raising their UIPDs more than for large firms. (3) This size-differentiated impact stems from the relatively higher interest rates on domestic currency loans faced by small firms. (4) In contrast, interest rates on dollar-denominated loans respond homogeneously across all firms. (5) We find no differential effect on loan quantities, suggesting an active role of credit supply and demand. We rationalize these findings with a small open economy model of corporate default that incorporates heterogeneous firms borrowing from domestic banks in both foreign and domestic currencies. In our model, a higher FFR reduces the marginal cost of defaulting on domestic-currency debt for small firms more than for large firms. |
| Keywords: | uncovered interest rate parity, U.S. monetary policy, bank lending, firm financing, firm heterogeneity |
| JEL: | E43 E44 F30 F41 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2530 |
| By: | Max Miller; James D. Paron; Jessica Wachter |
| Abstract: | Sovereign debt yields have declined dramatically over the last half-century. Standard explanations, including aging populations and increases in asset demand from abroad, encounter difficulties when confronted with the full range of evidence. We propose an explanation based on a decline in inflation and default risk. We show that a model with sovereign default captures the decline in interest rates, the stability of equity valuation ratios, and the reduction in investment and output growth. Calibrations of the model post-Covid suggest that sovereign default risk may have returned. |
| JEL: | E31 E43 G12 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34021 |
| By: | Tamon Asonuma (International Monetary Fund); Hyungseok Joo (University of Surrey) |
| Abstract: | Sovereigns implement fiscal austerity, i.e., expenditure consolidation around debt crises. We compile data on fiscal expenditure consolidation around debt restructurings with private external creditors in 1975–2020. We find that expenditure consolidation precedes preemptive restructurings or prevents restructurings—“ex ante†—, while occurs upon defaults/postdefault restructurings—“ex post†. We build sovereign long-term debt model with endogenous choice of preemptive and post-default renegotiations and public capital accumulation. The model quantitatively shows when both public capital and debt are high, the sovereign implements ex ante fiscal expenditure consolidation which, in turn, results in preemptive restructurings or avoiding restructurings. Data support theoretical predictions. |
| JEL: | F34 F41 H63 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:sur:surrec:0525 |
| By: | Christian Bayer; Alexander Kriwoluzky; Gernot J. Müller; Fabian Seyrich |
| Abstract: | Attitudes toward fiscal policy differ: fiscal conservatism and fiscal liberalism varyin their willingness to tolerate budget deficits. We challenge the view that such attitudes reflect national preferences. Instead, we offer an economic explanation based on a two-country Heterogeneous Agent New Keynesian model, bringing its implicit political economy dimension to the forefront. We compute the welfare implications of alternative fiscal policies at the household level to assess the conditions under which a policy commands majority support. Whether the majority supports fiscal conservatism or liberalism depends on a country’s debt level, its wealth distribution, and the nature of the economic shock. |
| Keywords: | HANK, Two-country model, Political Economy, Government debt, Fiscal policy, household heterogeneity |
| JEL: | E32 H63 F45 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_694 |
| By: | Matthes, Jürgen |
| Abstract: | Compared to 2020, the deficit in merchandise goods trade with China is 3.6 times higher for Germany in 2025 (annualised based on data from January to April 2025) and it has doubled for the Euro area. However, the nominal exchange rate of the Yuan against the Euro has hardly changed between 2020 and 2025. This is all the more striking as European goods have become much more expensive: Producer prices have risen by more than 35 per cent in Germany and the Euro area compared with early 2020, whereas Chinese producer prices have hardly increased at all. The immense producer price divergence is mostly due to an external shock in Europe that resulted from supply chain restrictions in the course of the COVID-19-pandemic and from the energy cost increases after the Russian invasion of Ukraine. This constellation has caused a very large real appreciation (based on producer prices) of the Euro against the Yuan of more than 40 per cent for Germany and for the Euro area between early 2020 and spring 2025. The resulting huge cost disadvantage has likely contributed considerably to the rise in the trade deficit as an appreciation of the Euro renders European exports more expensive and imports from China less costly. Moreover, the real appreciation appears to be an important reason why about half of German industrial firms facing Chinese competition reported in 2024 that Chinese competitors undercut their prices by more than 30 per cent (Matthes, 2024). This large European cost disadvantage would have been prevented if the Yuan had appreciated against the Euro to a significant degree. In fact, a rising trade deficit leads to higher netdemand for Yuan in Euro on the exchange rate market as European importers sell Euro to obtain Yuan in order to buy goods from Chinese sellers. Thus, the Yuan should have appreciated if it was floating freely. However, the Yuan exchange rate is managed by the central bank of China relative to the US Dollar and to a basket of other currencies. As the Yuan did not appreciate against the Euro, the question arises whether this is a case of currency manipulation and whether China's significant cost advantage can be deemed unfair. To investigate this question, also other components of the bilateral balance of payments between the Euro area and China have to be taken into consideration as they also influence the net demand for Yuan in Euro. Indeed, the balances in services trade and in primary incomes (other components of the current account apart from the balance in merchandise goods trade) are positive. Thus, these components reduce the net demand for Yuan in Euro that is caused by the negative goods trade balance, but only to a small degree. Moreover, also capital flows have to be considered (that are measured in the financial account balance). However, there is a lack of data for portfolio investment inflows from China to the Euro area so that total capital inflows cannot be calculated. However, this missing component can be estimated (Chapter 3.2). Based on this estimation, the overall change in the net demand for Yuan in Euro between 2020 and 2024 can also be estimated: it has significantly risen by EUR 125 billion. These findings provide strong indications for currency manipulation and for a significant and unfair undervaluation of the Yuan against the Euro. If there had been a free and market-based bilateral exchange rate market, the rising net demand for Yuan in recent years should have led to a significant appreciation of the Yuan against the Euro. As this was prevented by the central bank of China's currency management policies, a considerable unfair price advantage for China has resulted, which comes at the expense of European companies that compete with Chinese firms on the world market. The large increase in the merchandise trade deficit with China is a clear indication of the relevance of the Yuan's undervaluation against the Euro. As European industry is seriously threatened by this development, trade policy action is urgently warranted in order to re-establish a level playing field. |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:iwkrep:323227 |