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on Open Economy Macroeconomics |
| By: | Sebastian Horn; Carmen M. Reinhart; Christoph Trebesch |
| Abstract: | This paper provides a comprehensive overview of China’s lending to developing countries—a central feature of today’s international financial system. Building on our previous research and the work of others, we document the scale, destination, and terms of China’s overseas lending boom, as well as the lending bust and defaults that have followed. We compare China’s lending boom to past boom-bust cycles and discuss the implications of China’s rise as an international creditor on recipient countries and sovereign debt markets. The evidence indicates that Chinese state banks are assertive and commercially sophisticated lenders. For recipient countries, however, the jury is still out: it remains to be seen whether the gains from China’s lending—through growth and improved infrastructure—will outweigh the more immediate burdens of debt service or the multifaceted costs of default. |
| JEL: | E3 F34 F65 F68 N2 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34359 |
| By: | Robin Brooks; Eswar S. Prasad |
| Abstract: | The dominant currency paradigm posits that dollar invoicing reduces the potency of exchange rate depreciations in boosting export volumes. This implies that export elasticities with respect to the exchange rate are small, rendering even large depreciations ineffectual in the short term. We incorporate two innovations versus existing work. First, we allow for nonlinearities, permitting large depreciations to disproportionately lift exports. Second, we control for banking crises, which accompany many depreciations. Our baseline export elasticity—without nonlinearities or banking crisis controls—is -0.3, consistent with prevailing “elasticity pessimism.” This elasticity rises to between -0.5 and -0.8 within two years for depreciations above 20 percent without banking crises. |
| JEL: | F14 F41 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34371 |
| By: | Mikael Juselius; Philip Wooldridge; Dora Xia |
| Abstract: | The depreciation of the US dollar in 2025 has occurred against the backdrop of continued resilience of trade and economic activity in emerging market economies (EMEs). A depreciating dollar affects both borrowers' and foreign investors' balance sheets and tends to loosen financial conditions in EMEs through the risk-taking channel of exchange rates. As EMEs have increasingly become net creditors to the rest of the world, the currency hedging behaviour of EME investors has played a greater role in currency market dynamics in 2025. |
| Date: | 2025–10–13 |
| URL: | https://d.repec.org/n?u=RePEc:bis:bisblt:114 |
| By: | Yongheng Hu |
| Abstract: | In this paper, we model USD-CNY bilateral exchange rate fluctuations as a general stochastic process and incorporate monetary policy shock to examine how bilateral exchange rate fluctuations affect the Revealed Comparative Advantage (RCA) index. Numerical simulations indicate that as the mean of bilateral exchange rate fluctuations increases, i.e., currency devaluation, the RCA index rises. Moreover, smaller bilateral exchange rate fluctuations after the policy shock cause the RCA index to gradually converge toward its mean level. For the empirical analysis, we select the USD-CNY bilateral exchange rate and provincial manufacturing industry export competitiveness data in China from 2008 to 2021. We find that in the short term, when exchange rate fluctuations stabilize within a range less than 0.2 RMB depreciation will effectively boost export competitiveness. Then, the 8.11 exchange rate policy reversed the previous linear trend of the CNY, stabilizing it within a narrow fluctuation range over the long term. This policy leads to a gradual convergence of provincial RCA indices toward a relatively high level, which is commensurate with our numerical simulations, and indirectly enhances provincial export competitiveness. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2509.15169 |
| By: | Matias Moretti (University of Rochester); Lorenzo Pandolfi (University of Naples Federico II and CSEF); Sergio L. Schmukler (World Bank Research Department); Tomas Williams (George Washington University); German Villegas-Bauer (International Monetary Fund) |
| Abstract: | We study how investor demand influences government borrowing capacity, default risk, and bond prices. We develop a sovereign debt model with a rich demand structure, featuring investors with asset-allocation mandates. In our framework, bond prices depend not only on government policies and default risk, but also on investor composition and demand elasticity. We estimate this elasticity from bond price responses to the periodic rebalancing of a major emerging markets bond index, which shifts investors’ allocations. We calibrate the model using this estimate and show that a downward-sloping demand acts as a disciplining device that mitigates debt dilution by curbing future issuance. This market-based mechanism lowers default risk and allows the government to sustain higher debt. Unlike standard models, where discipline arises from default penalties, our mechanism operates through investor behavior. This distinction matters for policy: with market discipline in place, fiscal rules have milder effects on borrowing and default risk. |
| Keywords: | sovereign debt, inelastic investors, disciplining device, debt dilution, fiscal rules |
| JEL: | F34 F41 G15 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:anc:wmofir:192 |
| By: | Patricia Gomez-Gonzalez; Maximiliano Jerez-Osses; Vida Maver; Jorge Miranda-Pinto; Jean-Marc Natal |
| Abstract: | Commodities play a central yet often underappreciated role in shaping macroeconomic fluctuations across both advanced economies (AEs) and emerging market and developing economies (EMDEs), with the latter exhibiting greater volatility. This paper examines how the domestic interconnectedness of the commodity sector conditions the transmission of commodity price shocks. Rather than focusing only on sectoral size, we emphasize production linkages, measured by the network-adjusted value-added share (NAVAS) of the commodity sector. Using panel local projections for OECD countries, we show that greater interconnectedness amplifies the positive effects of terms-of-trade gains on consumption while mitigating the negative effects of declines. To interpret these results, we develop a small open economy model with production networks. The model highlights how commodity interconnectedness strengthens wealth channels but dampens real wage channels, shaping the overall macroeconomic response. Our findings underscore the importance of network structures in explaining commodity shock propagation and the heightened volatility observed in EMDEs. |
| Keywords: | Production Networks; Commodity Prices; Network-Adjusted Value- Added Share; Advanced Economies and Emerging Markets |
| Date: | 2025–10–14 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/208 |
| By: | María Alejandra Amado (BANCO DE ESPAÑA); Carlos Burga (PUC-CHILE); José E. Gutiérrez (BANCO DE ESPAÑA) |
| Abstract: | We document a novel channel through which domestic bank regulations generate cross-border real effects via international trade. Our setting is a one-time, unexpected increase in loan loss provisions in Spain in 2012. Using comprehensive administrative data from the Spanish credit register matched with customs data, we show that importers relying on the most affected banks experienced sharp reductions in credit supply, which led to a decline in their purchases abroad. Leveraging bilateral trade data at the country-product level, we find that Spanish aggregate imports declined, indicating limited reallocation across firms: the shock on highly exposed importers was not offset by the expansion from less exposed ones. This decline in Spain’s import demand is transmitted internationally, as total exports of Spain’s trading partners fell. The effect was stronger for countries with less developed financial systems, for exporters facing higher bilateral trade costs vis-à-vis Spain, and for products that are harder to reallocate across markets. Our findings highlight international trade as a key transmission mechanism of banking regulation –and domestic shocks more broadly– with implications for the cross-border coordination of prudential policy. |
| Keywords: | bank regulations, spillovers, international trade |
| JEL: | F14 F36 F42 G21 G28 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2538 |
| By: | Paponpat Taveeapiradeecharoen; Nattapol Aunsri |
| Abstract: | Forecasting inflation in small open economies is difficult because limited time series and strong external exposures create an imbalance between few observations and many potential predictors. We study this challenge using Thailand as a representative case, combining more than 450 domestic and international indicators. We evaluate modern Bayesian shrinkage and factor models, including Horseshoe regressions, factor-augmented autoregressions, factor-augmented VARs, dynamic factor models, and Bayesian additive regression trees. Our results show that factor models dominate at short horizons, when global shocks and exchange rate movements drive inflation, while shrinkage-based regressions perform best at longer horizons. These models not only improve point and density forecasts but also enhance tail-risk performance at the one-year horizon. Shrinkage diagnostics, on the other hand, additionally reveal that Google Trends variables, especially those related to food essential goods and housing costs, progressively rotate into predictive importance as the horizon lengthens. This underscores their role as forward-looking indicators of household inflation expectations in small open economies. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2509.14805 |
| By: | Beckmann, Joscha; Bettendorf, Timo |
| Abstract: | In this paper, we analyze the effects of uncertainty shocks on portfolio flows in 25 emerging market and 21 advanced economies and shed light on socio-economic characteristics that may be relevant for the country-specific sensitivity towards the shocks. We derive uncertainty shocks from a proxy SVAR model, where the uncertainty shock is identified by changes in the price of gold during selected events. Taking into account the structural shock, we employ local projections of investment fund flows into 25 emerging market and 21 advanced economies for the period 2005M8 to 2023M12. Our results show that uncertainty shocks have much stronger negative effects on capital flows in emerging economies for both bond and equity flows. Our results also show that bond fund flows are much more strongly affected by uncertainty shocks compared to equity flows over both the short and the medium run. Finally, we find that economic characteristics relating to the sensitivity towards the shock differ across advanced economies and emerging markets. |
| Keywords: | Uncertainty, portfolio flows, SVAR, local projections |
| JEL: | E43 E47 E52 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:328246 |