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on Open Economy Macroeconomics |
| By: | Linda S. Goldberg; Samantha Hirschhorn |
| Abstract: | Global factors, like monetary policy rates from advanced economies and risk conditions, drive fluctuations in volumes of international capital flows and put pressure on exchange rates. The components of international capital flows that are described as global liquidity—consisting of cross-border bank lending and financing of issuance of international debt securities—have sensitivities to risk conditions that have evolved considerably over time. This risk sensitivity has been driven, in part, by the composition and business models of the financial institutions involved in funding. In this post, we ask whether these same features have led to changes in the pressures on currency values as risk conditions evolve. Using the Goldberg and Krogstrup (2023) Exchange Market Pressure (EMP) country indices, we show that the features of financial institutions in the source countries for international capital do influence how destination countries experience currency pressures when risk conditions change. Better shock-absorbing capacity in financial institutions moderates the pressures toward depreciation of currencies during adverse global risk events. |
| Keywords: | currency; depreciation; Foreign exchange market; risk; bank capital |
| JEL: | F3 |
| Date: | 2025–09–22 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:101760 |
| By: | Giancarlo Corsetti; Anna Lipinska; Giovanni Lombardo |
| Abstract: | We study international risk sharing across countries differing in size, openness, and productivity distributions, emphasizing fat tails. In a canonical IRBC model, safer economies benefit through asset and terms-of-trade revaluations, while riskier ones smooth consumption at the cost of lower wealth. Calibrated to non-Gaussian shocks, country size and openness, the model predicts welfare gains between 0.03% and 6.9% of permanent consumption (median 6%). Assuming Gaussian shocks reduces gains by about 2 percentage points, while assuming equal country size and no home bias renders them negligible. Clustering economies by openness, size, and higher moments accounts for the cross-country distribution of gains. |
| Keywords: | asymmetries in risk, openness, country size, tail risk, gains from risk sharing, consumption smoothing, terms of trade, wealth transfers |
| JEL: | F15 F41 G15 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1293 |
| By: | Chang Ma; Alessandro Rebucci; Sili Zhou |
| Abstract: | Chinese private portfolio equity outflows, though small compared to other Chinese outflows, are growing rapidly because of capital account liberalization and capital flight. Using granular stock-holding data on Qualified Domestic Institutional Investor (QDII) mutual funds, we identify a nascent financial channel of international transmission of Chinese monetary policy to world stocks. Event study analysis around monetary policy announcement days reveals that monetary policy tightening depresses returns of country equity indexes and individual U.S. stocks with QDII fund exposure relative to non-exposed stocks. The results are robust to controlling for the real transmission channel of Chinese monetary policy and other confounders. The effect is driven by smaller and less liquid firms, but not by China-concept stocks or those highly exposed to China's macroeconomic shocks. We also find that the results are driven by household portfolio rebalancing from more to less risky assets following the announcement. |
| JEL: | F30 G10 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34291 |
| By: | Robert A. Blecker (Professor Emeritus of Economics, American University) |
| Abstract: | The revival of economic nationalism poses a challenge to neoclassical orthodoxy, which claims that liberalized international trade is (subject to a few recognized exceptions) inherently cooperative and mutually beneficial. Post-Keynesian open economy models demonstrate that international trade relations can be conflictive under certain conditions. In the short run, changes in either cost or quality competitiveness can shift output, growth, and employment from some countries to others. In the medium run, positive feedbacks from growth of exports to growth of labor productivity create self-reinforcing gains in external competitiveness for some countries that may come at the expense of losses for others. In the long run, changes in the real exchange rate or terms of trade can favor some countries’ growth at the expense of others’. The post-Keynesian approach also implies that coordinated fiscal expansions can mitigate these conflicts and foster more cooperative outcomes, while industrial policies are generally superior to protectionism. |
| Keywords: | Economic nationalism, export-led cumulative causation, international conflict, real exchange rate, trade balance |
| JEL: | F43 E12 O41 B52 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:imk:fmmpap:119-2025 |
| By: | Philippe Andrade; Alexander Dietrich; John Leer; Xiao Lin; Raphael Schoenle; Jenny Tang; Egon Zakrajšek |
| Abstract: | Amid evolving global trade policy and rising tariff uncertainty, understanding how small and medium-sized businesses (SMBs) form expectations about future costs and adjust their pricing is critical for assessing how the recently imposed tariffs on US imports could impact consumer prices. To that end, we analyze several waves of a survey of owners and other decision-makers at a nationally representative sample of US SMBs, defined as companies that employ 500 or fewer workers. We focus on waves conducted during the period of December 2024 to August 2025. |
| Keywords: | business expectations; surveys; tariffs; cost pass-through; inflation |
| JEL: | C83 E31 F13 F14 F40 |
| Date: | 2025–09–29 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedbcq:101819 |
| By: | Barthélémy Bonadio; Zhen Huo; Elliot Kang; Andrei A. Levchenko; Nitya Pandalai-Nayar; Hiroshi Toma; Petia Topalova |
| Abstract: | We adopt a data-driven approach to measure trade fragmentation over the period 2015-2023. Countries are classified into three groups according to changes in their trade costs with the US and China: those shifting toward the US bloc, those shifting toward the China bloc, and those with no change in alignment. Roughly one-quarter of countries moved toward each bloc, while about half showed no realignment. We document that while cross-bloc trade costs rose, they were accompanied by falling within-bloc trade costs. We use a quantitative model to compute the real income effects of this reconfiguration of the global trade costs. The median country in the world, and the median country within each bloc, has 0.4-0.6% higher real income as a result of the observed decoupling, contrary to the widespread belief that fragmentation has been welfare-reducing. Finally, we find a modest amount of bloc misalignment: the median country moving to the US bloc would actually be better off moving to the China bloc, and vice versa. These results suggest that trade decoupling does not always follow trade-driven economic interests. |
| JEL: | F41 F44 F62 L16 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34302 |
| By: | Frache, Serafin; Lluberas, Rodrigo; Pedemonte, Mathieu; Turén, Javier |
| Abstract: | Motivated by the dominant role of the US dollar, we explore how monetary policy (MP) shocks in the United States can affect a small open economy through the expectation channel. We combine data from a panel survey of firms' expectations in Uruguay with granular information about firms' debt position. We show that a contractionary MP shock in the United States reduces firms' inflation and cost expectations in Uruguay. This result contrasts with the effect of this shock on the Uruguayan economy. We study mechanisms related to how firms and managers experience in different monetary policy regimes can explain the results and discuss their implications. |
| Keywords: | Firms’ expectations;Global financial cycle;Monetary policy spillovers |
| JEL: | E31 E58 F41 D84 E71 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:14286 |
| By: | YiLi Chien; Zhengyang Jiang; Matteo Leombroni; Hanno Lustig |
| Abstract: | We compute the cross-country transfers that result from unconventional monetary policy in the Eurozone. The ECB funds the expansion of its aggregate balance sheet mostly by issuing bank reserves and cash in core countries. The national central banks (NCBs) in periphery countries then borrow from the core NCBs at below-market rates to fund the asset purchases and bank lending. In addition, NCBs in the periphery lend more to their own banks at below market rates. To compute the cross-country transfers, we compare the resulting cross-country distribution of NCB income to a counterfactual scenario without the ECB and without non-marketable intra-Eurozone debt. We document significant and persistent transfers from the core to the periphery. |
| Keywords: | unconventional monetary policy; financial repression; monetary union; Target2 |
| JEL: | E42 E52 F33 G15 |
| Date: | 2025–09–22 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:101808 |
| By: | Cubel Montesinos, Antonio; Solaz, Marta; Sanchís Llopis, M. Teresa |
| Abstract: | This paper studies the pattern of world trade in capital goods during the two key decades following World War II (1954-1973) by applying the Network Analysis methodology to study world trade as proposed by De Benedictis and Tajoli (2011). Departing from the technological superiority of US and Germany in machinery and transport equipment industries, their role asthe world main exporters is unquestionable. However, their relative presence in the world market, and more specifically in the European market, changed along the Golden Age period. While exports from the US dominated the European markets in the aftermath of the Second World War, the way the reconstruction was addressed and the new order favorable to tradeliberalization consolidated a network less dependent on the quasi-aboslute dominace of the United States prevailing after the war. |
| Keywords: | Bilateral trade; Equipment; Golden Age; Network analysis |
| JEL: | F43 F21 O33 O51 |
| Date: | 2025–09–30 |
| URL: | https://d.repec.org/n?u=RePEc:cte:whrepe:48102 |
| By: | Urban Jermann; Bin Wei; Vivian Yue |
| Abstract: | This paper develops an asset-pricing model to evaluate the credibility of Hong Kong’s Linked Exchange Rate System (LERS). Allowing for imperfect peg credibility, we derive closed-form solutions for exchange rates and option prices under potential regime shifts. Using HKD option data, we estimate market-implied probabilities of peg survival and the fundamental value of the HKD. Our results show that credibility fluctuates with U.S. interest rate hikes, local liquidity conditions, and Chinese currency dynamics. Compared with more standard Black-Scholes-based models, our approach provides more realistic assessments of peg sustainability. |
| JEL: | F3 F31 G13 G15 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34300 |
| By: | Hack, Lukas; Diebold, Lukas |
| JEL: | F34 H63 G24 O11 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc25:325387 |
| By: | Bieske, Lara; Adam, Hanna; Stadelmann, David; Larch, Mario |
| JEL: | F15 F43 O18 R12 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc25:325414 |
| By: | Arvai, Kai; Coimbra, Nuno |
| JEL: | E42 F02 F33 N10 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc25:325376 |
| By: | Colin Weiss |
| Abstract: | I examine how governments have managed their holdings of gold and dollar reserves in recent decades, a period when gold’s share of aggregate international reserves rose and the dollar’s share fell. Using data on central banks’ reserve currency composition and official sector purchases of U.S. assets, I argue that gold reserve accumulation is generally not associated with de-dollarization of international reserves at the country level, except in a few prominent cases. Instead, gold purchases are more consistent with most countries pursuing a modest diversification of international reserves that does not solely target a reduced dollar share. My evidence suggests that this characterization also applies to gold reserve accumulation in 2022 and 2023. Finally, I show that, while gold’s importance as a store of value for the official sector has grown since 2000, its use as a unit of account and a medium of exchange remains limited. |
| Keywords: | International Reserves; Gold; Dollar |
| JEL: | F30 F31 F33 |
| Date: | 2025–09–05 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:1420 |
| By: | Castells-Jauregui, Madalen; Kuvshinov, Dmitry; Richter, Björn; Vanasco, Victoria |
| Abstract: | Using novel data on sectoral safe asset positions in 21 advanced economies since 1980, we document the central role of the foreign sector in the market for safety and its macroeconomic implications. We show that safe asset holdings have expanded significantly relative to GDP, driven by rising net holdings of the foreign sector and accommodated by increased issuance from the financial and public sectors. Furthermore, fluctuations in safe assets are almost exclusively driven by the foreign and financial sectors, with close links between the two. Finally, increases in foreign demand for safety-or its counterpart, the supply by financials-are associated with domestic credit expansions and weaker medium-term output growth, both in raw data and when using FX reserve accumulation in Asian economies as instrument. JEL Classification: E42, E44, E51, F33, F34, G15 |
| Keywords: | business cycles, capital flows, financial accounts, financial stability, safe assets |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253126 |
| By: | Andrés Rodríguez-Clare; Feodora A. Teti; Mauricio Ulate; Jose P. Vasquez; Roman D. Zarate; Feodora Teti; Feodora Teti |
| Abstract: | We use detailed tariff data and a dynamic trade and reallocation model with downward nominal wage rigidities to quantitatively assess the economic consequences of the recent increase in U.S. import tariffs and the responses of its trading partners. Higher tariffs trigger an expansion in U.S. manufacturing and agricultural employment, but this comes at the expense of a decline in service employment, with overall employment declining as lower real wages reduce labor-force participation. For the United States as a whole, real income falls around 0.1% by 2028, the last year we assume the high tariffs are in effect. Importantly, our analysis disaggregates the U.S. into its 50 states, while incorporating cross-state redistribution of the tariff-generated fiscal revenue, allowing us to analyze which states gain or lose more from the shock. Some of the most populous states, like California, New York, and Texas, suffer real income declines of up to 1.4%. On the flip side, 34 states gain, in some cases as much as 1.9%. Turning to cross-country results, some close U.S. trading partners - like Canada, Mexico, and Ireland - suffer the largest real income losses. |
| Keywords: | tariff changes, U.S. Tariffs, liberation day, canada, Mexico, China |
| JEL: | F10 F11 F13 F16 F40 F42 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12179 |
| By: | Agustin S. Benetrix (Department of Economics, Trinity College Dublin); Beren Demirolmez (European Stability Mechanism) |
| Abstract: | We study currency dominance in global portfolio debt, focusing on the US dollar and the euro. Our key contribution is the Dominance Ratio (DR), a new indicator that refines the measurement of currency internationalisation by excluding debt held by the regions issuing those currencies (the US for dollars, the Euro Area for euros). Using the DR, we find that the internationalisation of the dollar and euro evolves slowly and remains unaffected by short-term uncertainty shocks. However, these shocks affect the geographical distribution of dollar and euro debt. Trade policy uncertainty reduces euro concentration, increasing relative dollar concentration, whilst geopolitical risk shocks diminish both absolute and relative dollar concentrations, particularly when adjusted for currency scale using the DR. |
| Keywords: | currency dominance, dollar, euro, portfolio debt, uncertainty shocks |
| JEL: | E4 F21 F34 F41 F51 G1 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:tcd:tcduee:tep1025 |
| By: | A. Hakan Kara; Alp Simsek |
| Abstract: | Türkiye's response to post-pandemic inflation is a cautionary tale of how political pressure for low interest rates can create macroeconomic instabilities. While central banks worldwide raised interest rates to combat inflation in 2021-2023, Turkish authorities pursued the opposite strategy: cutting real rates to deeply negative levels while implementing financial engineering tools, FX interventions, and financial repression to stabilize markets. The centerpiece was a novel FX-protected deposit scheme (KKM) that guaranteed depositors against currency depreciation, shifting exchange rate risk to the government balance sheet. We provide a detailed account of this policy experiment and develop a theoretical model focusing on how KKM functions and creates vulnerabilities. Our model reveals that pressure to keep interest rates below inflation-targeting levels can lead to an interconnected destabilizing sequence. Low rates generate inflation, current account deficits, and exchange rate depreciation. KKM provides partial stabilization by effectively raising rates for savers while maintaining low rates for borrowers. However, this creates growing contingent fiscal burdens and vulnerability to self-fulfilling currency and sovereign debt crises. This explains additional policies adopted including capital flow management, financial repression, and return to orthodox monetary policy. As central banks worldwide face renewed pressure to set lower policy rates, Türkiye's experience illustrates the consequences. |
| JEL: | E43 E52 E58 F31 F32 F41 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34287 |
| By: | Tetiana Unkovska; Sergei Konoplyov |
| Abstract: | Global imbalances have been building up in the world economy for decades and have reached critical levels, giving rise to tariff confrontations, trade wars, and geopolitical tensions. This paper presents our systemic analysis of three global imbalances: international trade, debt dynamics, and finance. Based on our new systemic concept of global imbalances and analysis of a large body of historical and latest financial and economic data in various countries and the world economy, we have concluded that these three global imbalances are closely interconnected and mutually influence each other through different channels and nonlinear feedback mechanisms that we describe. These three global imbalances are interrelated symptoms of deep structural problems in the global economy that require corrective measures both at the level of individual countries, especially the US and China, and at the global coordinated efforts by key countries within the G7 and G20. We highlight the key structural problems in the global economy, suggest a modern interpretation of the Triffin dilemma through the prism of equilibrium levels of exchange rates, and suggest possible measures to mitigate the global imbalances. |
| Keywords: | Trade, Foreign Direct Investment |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:glh:wpfacu:252 |