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on Open Economy Macroeconomics |
| By: | Timothy J. Kehoe; Xing Xu |
| Abstract: | In the late 1980s, Mexico opened itself to international trade and foreign investment, followed in the early 1990s by China. China and Mexico are still the two countries characterized as middle-income by the World Bank with the highest levels of merchandise exports. Although their measures of openness have been comparable, these two countries have had sharply different economic performances: China has achieved spectacular growth, whereas Mexico’s growth has been disappointingly modest. In this article, we extend the analysis of Kehoe and Ruhl (2010) to account for the differences in these experiences. We show that China opened its economy while it was still achieving rapid growth from shifting employment out of agriculture and into manufacturing while Mexico opened long after its comparable phase of structural transformation. China is only now catching up with Mexico in terms of GDP per working-age person, and it still lags behind in terms of the fraction of its population engaged in agriculture. Furthermore, we argue that China has been able to move up a ladder of quality and technological sophistication in the composition of its exports and production, while Mexico seems to be stuck exporting a fixed set of products to its North American neighbors. |
| JEL: | F43 O32 O47 O57 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34181 |
| By: | Menzie D. Chinn; Jeffrey A. Frankel; Hiro Ito |
| Abstract: | We analyze the determinants of individual central bank holdings of international reserves, as shares of gold, dollar, euro, pound, yen and yuan, over the 1999-2022 period. We augment standard economic determinants of size, exchange rate volatility, currency pegs and bilateral trade with bilateral political/economic variables such as disagreement in UN voting, military alliances, and financial and trade sanctions. These variables augment uncertainty measures such as global Economic Policy Uncertainty, US monetary and trade policy uncertainty, and the VIX. In addition, we investigate whether the US imposition of tariffs in 2018 had any measurable impact on dollar and other holdings. We conclude that financial sanctions and trade policy uncertainty have a statistically and economically significant effect on holdings of the US dollar. US tariffs had an economically – but not statistically – significant impact on shares of foreign exchange reserves: dollar shares fell by 2.1% and other shares rose by 0.8%. These findings can inform the debate regarding some of the benefits and costs of using such geo-economic policies. |
| JEL: | F33 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34177 |
| By: | Damien Capelle; Bruno Pellegrino |
| Abstract: | We use a dynamic spatial general equilibrium model of international investment and production to investigate the real implications of the last five decades of financial globalization. We introduce a wedge accounting framework to estimate country- and time-varying measures of outward and inward Revealed Capital Account Openness (RKO). We show how to identify these wedges for a large panel of countries using limited publicly available data on national accounts and external asset and liability positions since the 1970s. Our analysis reveals striking cross-country differences in the pace and direction of financial account opening: wealthier countries have become relatively more open to foreign capital inflows, while poorer countries have become relatively more open to capital outflows, a phenomenon we call “Unbalanced Financial Globalization.” Counterfactual simulations show that this unbalanced financial globalization has worsened capital allocation, resulting in a 5.9% decrease in world GDP, a 3.4% rise in cross-country income inequality, lower wages in poorer countries, and a decline in rates of return on capital in richer countries. In contrast, if financial account opening had been uniform, the improved allocation of capital would have reduced income inequality, and increased global GDP. These findings underscore the crucial role of spatial heterogeneity in shaping the real impact of international capital markets integration. |
| JEL: | F2 F3 F4 F6 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34121 |
| By: | Philippe Bacchetta; J. Scott Davis; Eric Van Wincoop |
| Abstract: | Global non-U.S. banks have significant dollar exposure both on and off their balance sheet. We develop a model to analyze their adjustment to dollar funding shocks, whether from reduced direct lending or external dollar shortages. The model provides insight into banks’ responses through borrowing, lending and FX swap positions, as well as the impact on their net worth, their probability of default and CIP deviations. Implications of the model are confronted with data on the response of non-U.S. global banks to major dollar funding shocks. We examine the benefits from buffering these shocks through central bank dollar swap lines or local currency lending by the central bank. |
| Keywords: | GSIB Banks; U.S. Dollar Liquidity; CIP Deviations; Liquidity Swap Lines |
| JEL: | F30 F40 |
| Date: | 2025–08–12 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:101523 |
| By: | Bellifemine, Marco; Couturier, Adrien; Jamilov, Rustam |
| Abstract: | This paper develops a multi-country Heterogeneous-Agent New Keynesian (HANK) model of a monetary union with ex-ante heterogeneity in legacy public debt across member states. We calibrate the model to the euro area and show that, following symmetric aggregate shocks, the systematic monetary policy reaction induces heterogeneous national outcomes, driven by differences in fiscal space. This generates a trade-off between union-wide macroeconomic stabilization and cross-country synchronization of economic activity for the central bank. We characterize a possibility frontier between union-wide inflation stability and cross-country synchronization, which is traced out by varying the degree of the central bank's hawkishness towards inflation. We study the role of deficit caps, fiscal and political unions, and augmented Taylor rules as instruments to navigate the stabilization–synchronization trade-off. |
| Keywords: | fiscal space; fiscal union; heterogeneous agents; monetary union |
| JEL: | E52 F41 F42 |
| Date: | 2025–08–22 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:128186 |
| By: | Marco Reuter; Mr. Itai Agur; Alexander Copestake; Maria Soledad Martinez Peria; Mr. Ken Teoh |
| Abstract: | Cross-border payments are changing: existing intermediaries are upgrading their networks and new platforms based on novel digital forms of money are being explored, even as geoeconomic fragmentation is introducing new frictions. We develop a stylized model to assess the potential implications for the level and volatility of capital flows and exchange rates. On levels, we find that lower frictions in cross-border payments reduce UIP deviations and increase capital flows. On volatility, we find that the impact of lower frictions depends on the type of shock and the degree to which frictions decline. For real shocks, lower frictions increase capital flow volatility and reduce exchange rate volatility. For financial shocks, lower frictions increase exchange rate volatility while the impact on capital flow volatility is ambiguous. Specifically, when frictions decline by a small amount, capital flow volatility increases, while the opposite holds when the reduction in frictions is large. An increase in frictions reverses these results. |
| Keywords: | Exchange Rates; Capital Flows; Interest Parity; Payment Frictions |
| Date: | 2025–08–29 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/171 |
| By: | Christoph Trebesch; Josefin Meyer; Alberto Martin; Fernando Broner |
| Abstract: | How do shifts in the global balance of power shape the world economy? We propose a theory of alignment-based "hegemonic globalization, " built on two central premises: countries differ in their preferences over policies (such as the rule of law or regulatory frameworks) and trade between any two countries increases with the degree of alignment in these policies. Hegemons promote policy alignment and thereby facilitate deeper trade integration. A unipolar world, dominated by a single hegemon, tends to support globalization. However, the transition to a multipolar world can trigger fragmentation, which is particularly costly for the declining hegemon and its closest allies. To test the theory, we use international treaties as a proxy for alignment and compile a novel "Global Treaties Database, " covering 77, 000 agreements signed between 1800 and 2020. Consistent with the theory, we find that hegemons account for a disproportionate share of global treaty activity and that treaty-signing is a leading indicator of increasing bilateral trade. |
| Keywords: | cooperation, globalization, hegemon, international coercion, international treaties, multipolar world, trade integration |
| JEL: | F02 F15 F50 F51 F55 F60 P45 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:bge:wpaper:1504 |
| By: | Friederike Niepmann; Leslie Sheng Shen |
| Abstract: | How do banks respond to geopolitical risk, and is this response distinct from other macroeconomic risks? Using U.S. supervisory data and new geopolitical risk indices, we show that banks reduce cross-border lending to countries with elevated geopolitical risk but continue lending to those markets through foreign affiliates—unlike their response to other macro risks. Furthermore, banks reduce domestic lending when geopolitical risk rises abroad, especially when they operate foreign affiliates. A simple banking model in which geopolitical shocks feature expropriation risk can explain these findings: Foreign funding through affiliates limits downside losses, making affiliate divestment less attractive and amplifying domestic spillovers. |
| Keywords: | geopolitical risk; bank lending; credit risk; international spillovers |
| JEL: | F34 F36 G21 |
| Date: | 2025–08–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedbwp:101470 |
| By: | Yushi YOSHIDA |
| Abstract: | People perceive the same level of nominal exchange rate as overvalued at one point in time and undervalued at a different point in time. To capture the perception of the exchange rate at specific times, we suggest constructing the perceived exchange rate by counting the newspaper articles with phrases ’appreciated currency’ or ’depreciated currency.’ A shift in the perceived exchange rate (PER) index alters the dynamic response of exchange rates in time series. The PER index is a valid threshold variable in forecasting future exchange rates. The forecast model with the PER index as a threshold variable (PER TAR) outperforms models utilizing the lagged exchange rates as a threshold variable. We also show that the forecast precision of the PER TAR model is as good as the survey forecasts by market participants. |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:eti:dpaper:25079 |
| By: | Miguel Acosta-Henao; Maria Alejandra Amado; Montserrat Martí; David Perez-Reyna |
| 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. |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:chb:bcchwp:1043 |