|
on Open Economy Macroeconomics |
| By: | Alok Johri |
| Abstract: | I build a sovereign default model in which importing economies must cover intermediate imports using accumulated foreign exchange (reserves). This occasionally-binding constraint: explains why imports and production fall during defaults; complements models with simultaneous holdings of debt and reserves; generates endogenous default costs that increase with output; and motivates defaults for reserve conservation. The model is less reliant on ad-hoc default costs prevalent in prior quantitative sovereign default models seeking to match the data. Simulations from the model reveal average output losses in default that are greater than 10%, and a 17% fall in imports and a large reserve-to-gdp ratio. |
| Keywords: | Sovereign default; imports and default costs; sovereign spreads; foreign exchange-in-advance constraints; international reserves |
| JEL: | F34 F41 E32 G15 H63 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:mcm:deptwp:2025-06 |
| By: | María José Arteaga Garavito; Riccardo Colacito; Mariano Max Croce; Biao Yang |
| Abstract: | We develop novel high-frequency indices that measure climate attention across a wide range of developed and emerging economies. By analyzing the text of over 23 million Tweets published by leading national newspapers, we find that a country experiencing more severe climate news shocks tends to see both an inflow of capital and an appreciation of its currency. In addition, brown stocks experience large and persistent negative returns after a global climate news shock if located in highly exposed countries. A risk-sharing model in which investors price climate news shocks and trade consumption and investment goods in global markets rationalizes these findings. |
| JEL: | F3 F4 G1 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34084 |
| By: | Benjamin Schwanebeck (FernUniversität in Hagen, Germany); Luzie Thiel (University of Kassel, Germany) |
| Abstract: | The financial situation of households differs substantially across countries, but the implications of this heterogeneity are still vastly understudied. We examine the implications of this asymmetry for optimal monetary policy in a currency union. We build a two-country monetary union model with heterogeneous households leading to inequality due to imperfect insurance. Money is introduced through central bank digital currency (CBDC) as a liquid asset to self-insure against idiosyncratic risk. CBDC is a new instrument which allows the central bank to target heterogeneity within a monetary union. We derive a welfare function with two additional objectives, consumption inequality within and across countries. The more heterogeneous households are, the less important inflation stabilization becomes in favor of stabilizing consumption inequality through providing money. Our research provides important policy implications as we show that it is beneficial for a monetary union to have a country-specific instrument to compensate for country differentials. |
| Keywords: | Heterogeneous Households, Imperfect Insurance, Optimal Monetary Policy, Monetary Union, Two-Country Model |
| JEL: | E52 E61 F45 |
| Date: | 2025–04–08 |
| URL: | https://d.repec.org/n?u=RePEc:mar:magkse:202512 |
| By: | Hayato Kato; Kensuke Suzuki; Motoaki Takahashi; Hayato Kato |
| Abstract: | We examine how tariffs affect sectoral composition and welfare in an economy with nonhomothetic preferences and sectors being complements---key drivers of structural change. Beyond their conventional role in trade protection, tariffs influence industrial structure by altering relative prices and income levels. We qualitatively characterize these mechanisms and use a quantitative dynamic model to show that a counterfactual 20-percentage-point increase in U.S. manufacturing tariffs since 2001 would have raised the manufacturing value-added share by one percentage point and increased welfare by 0.36 percent. However, if all the U.S. trading partners responded reciprocally, U.S. welfare would decline by 0.12 percent. |
| Keywords: | tariff, ricardian model of trade, structural transformation, nonhomothetic preferences, capital accumulation, trade war |
| JEL: | F11 F13 F16 F43 O41 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12050 |
| By: | Vintu, Denis |
| Abstract: | The Maastricht Criteria, also known as the convergence criteria, are a set of economic and fiscal requirements established by the Maastricht Treaty in 1992 to ensure that European Union (EU) member states maintain economic stability and are prepared for participation in the Economic and Monetary Union (EMU) and adoption of the euro. Among these criteria, public debt plays a crucial role in maintaining fiscal discipline and preventing excessive government borrowing that could undermine economic stability. Specifically, the Maastricht Criteria set a limit on public debt at no more than 60\% of a country’s Gross Domestic Product (GDP), alongside a fiscal deficit ceiling of 3\% of GDP. These thresholds aim to promote sustainable public finances, reduce the risk of debt crises, and foster confidence among member states and investors. Understanding the criteria related to public debt is essential in assessing the fiscal health and convergence readiness of countries within the EU framework. |
| Keywords: | Maastricht Criteria, Public Debt, Fiscal Policy, Debt Sustainability, European Union, Economic and Monetary Union, Fiscal Discipline |
| JEL: | E62 F45 H63 H68 O52 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125712 |
| By: | Boris Podobnik; Dorian Wild; Dejan Kovac |
| Abstract: | We show that the amount of foreign exchange reserves (FER) in the world in a given currency is highly correlated with the GDP and military spending of that country for a set of western economies during the last 20 years. Taking into account multicollinearity, Ridge and Lasso regressions reveal that the Foreign Exchange Reserve is better explained by military spending than GDP for seven western currencies. For each year shown, military spending is statistically significant more than the monetary instrument M2. Comparing the currency of the second world economy, the Chinese renminbi, is well beyond the western FER equilibrium, but yearly analysis shows that there is a steady trend towards a new FER balance. Next, we define a complex geopolitical network model in which the probability of switching to an alternative FER currency depends both on economic and political factors. Military spending is introduced into the model as an average share of GDP observed within the data. As the GDP of a particular country grows, so does the military power of a country. The nature of the creation of new currency networks initially depends only on geopolitical allegiance. As the volume of trade with a particular country changes over a designated threshold, a country switches to the currency of that country due to increased trade. If the current steady trend continues within the same geopolitical setting as in the past twenty years, we extrapolate that the RMB and Western currencies could reach a new FER balance within 15 to 40 years, depending on the model setup. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2507.05856 |
| By: | Saadaoui, Jamel |
| Abstract: | This paper introduces a novel identification strategy of geopolitical turning points, defined as sharp, unanticipated inflection points in bilateral relations. These shocks are measured using the second difference of the Political Relationship Index (Δ²PRI), an event-based monthly index derived from Chinese sources. Unlike standard geopolitical risk indices, Δ²PRI isolates events that represent exogenous shifts in diplomatic relationships. Using quantile IV-local projections, the paper studies the causal and asymmetric impact of these shocks on global oil prices. An improvement in US–China relations reduces oil prices by 0.2% in the short run and raises them by 0.3% in the medium run, with effects varying across the oil price distribution. The extension to the Japan–China dyad supports external validity. The Δ²PRI instrument offers a reusable framework for analyzing bilateral political shocks across various macroeconomic outcomes, making a methodological contribution to the international economics literature. |
| Keywords: | Geopolitical Risk, Oil Prices, Quantile Local Projections, Instrumental Variables. |
| JEL: | C26 C32 F41 F51 |
| Date: | 2025–01–31 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125586 |