|
on Open Economy Macroeconomics |
| By: | Husnu C. Dalgic; Galip Kemal Ozhan |
| Abstract: | This paper argues that currency risk premia are an endogenous outcome of a country’s fundamental trade and financial structures. Empirically, we isolate global risk factors from currency returns and show that a country’s exposure to these factors is jointly determined by its share of dollar invoicing and its net foreign debt position. We then develop a small open-economy model with dominant-currency pricing (DCP) and dollar-denominated liabilites to explain the underlying mechanism. The model demonstrates that empirically plausible risk premia require the interaction of both frictions. High dollar invoicing mutes the expenditure switching channel, while high dollar debt creates a potent, contractionary financial channel. Together, these frictions make currency depreciations recessionary (countercyclical), rendering the currency a poor hedge and "risky" for investors. We show this has a first-order policy consequence: the resulting risk premium raises the economy’s neutral interest rate, leading to structurally high inflation under a standard Taylor rule. Our results show how trade and financial frictions jointly create currency risk and pose a fundamental challenge for monetary policy |
| Keywords: | Currency returns, dominant currency pricing, uncovered interest parity, inflation, dollar debt. |
| JEL: | E44 F32 F41 G15 G21 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_717 |
| By: | Christian Buelens; Leonor Coutinho; Adrian Ifrim; Marco Ratto |
| Abstract: | This paper assesses the macroeconomic impact of deglobalisation scenarios using an estimated three-region global dynamic general equilibrium framework, considering the euro area, the US, and the rest of the world. We focus on two structural deglobalisation trend scenarios: first, exogenous disruptions to inter-regional trade, and second, greater inward orientation that is reflected in a higher home bias. Our simulations reveal that the trade compression caused by deglobalisation significantly reduces economic activity globally and in the individual blocs. Transition dynamics are typically stagflationary and are often characterised by substantial exchange rate fluctuations. We show that bilateral trade disruptions have both direct and indirect effects, which intensify the more regions are open and integrated into global value chains. Additionally, we find that inward orientation is generally costly when occurring universally. However, a unilateral increase in a region’s home bias that entails no other costs, might spur economic activity in the region implementing it. This benefit is at a disproportionate expense to others, as their export markets contract and their currencies devalue. However, if the preference shift entails efficiency costs, in terms of stifled competition or more rigid labour markets, a favourable unilateral outcome is less likely to materialise. Finally, we discuss the international transmission of shocks and show that in a less globalised steady state, external shocks produce less volatility for the euro area economy in terms of GDP and inflation, but there is also less external attenuation of domestic shocks. One implication is that certain structural trends observed in recent decades, such as the ‘globalisation of inflation’, may weaken as a result. |
| JEL: | F13 F41 F62 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:euf:dispap:227 |
| By: | Felipe Beltrán; Mr. David O Coble Fernandez; Manuel Escobar; Felipe D Rojas |
| Abstract: | In this paper we study how aggregate demand surprises affect and propagate to the global economy, with particular attention to their impact on Emerging Market Economies (EMEs). To do so, we introduce a new high-frequency external instrument to identify global demand shocks: the sensitivity of oil futures prices around labor market announcements from the US and the Euro Area, two events that consistently trigger strong revisions in global growth expectations across financial markets. Using a proxy-SVAR framework, our results suggest that a global demand shock has positive effects on world industrial production, reduces oil inventories and global uncertainty, and improves financial conditions. In EMEs, upward revision in macroeconomic outlook leads to higher industrial production and inflation, real exchange rate appreciation, and lower EMBI spreads. When the sample is split between oil-importers and exporters, we observe results consistent with the role of external trade exposure in shaping transmission, heterogeneity in the magnitude and persistence of output, inflation, real exchange rates, and sovereign risk responses. These results are consistent with theoretical expectations and the related literature. Our findings offer a credible empirical strategy for isolating global demand shocks and have direct implications for empirical macroeconomic modeling of emerging market economies. |
| Keywords: | Proxy SVAR; oil futures prices; global demand shocks; Emerging Markets; high frequency identification; labor reports releases |
| Date: | 2025–12–05 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/253 |
| By: | Emilio Ocampo; Nicolás Cachanosky |
| Abstract: | Exchange rates reflect macroeconomic fundamentals, which in turn are regime dependent. In politically unstable countries, expectations of regime change can have a significant impact on exchange rate dynamics. We exploit Argentina’s unexpected 2019 primary election results as a natural experiment to gauge the impact of a change in such expectations. When populist candidate Alberto Fernández’s victory margin (15.6%) doubled pre-election polling predictions (7.2%), financial markets immediately recalculated the probability of a change in regime. Using parallel market exchange rates, we estimate that the real exchange rate differential between populist and non-populist regimes exceeds 100%. This large gap creates extreme political sensitivity: regime change expectations of 7-16% can trigger 10% exchange rate movements. Our findings help explain persistent exchange rate volatility in emerging economies and highlight the limitations of purely macroeconomic stabilization approaches when political sustainability is uncertain. |
| Keywords: | exchange rates, regime uncertainty, Argentina |
| JEL: | E42 E52 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:cem:doctra:908 |
| By: | Charles Yuji Horioka (Center for Computational Social Science and Research Institute for Economics and Business Administration, Kobe University, Asian Growth Research Institutem, Institute of Social and Economic Research, Osaka University, Asian Growth Research Institute, JAPAN, and National Bureau of Economic Research, U.S.A.); Nicholas Ford (Wolfson College, University of Cambridge, U.K.) |
| Abstract: | In this paper, we show that the existing models and descriptions of the transfer of capital between countries that are provided in international economics are inadequate because they fail to explain the causes of, or the consequences of, persistent trade imbalances and because the assumption that there is a world interest rate, r* at which all countries can theoretically lend or borrow is extremely misleading.Instead, we argue that a more fruitful modeling approach is to regard the world as consisting of a number of regions, each of which has a particular rate of return on capital, which is a function of the local marginal product of capital (MPK). We demonstrate that such a modeling approach can provide some additional insights into who gains and loses from persistent trade deficits and how this might be affected by the Trump Administration's tariff policy. |
| Keywords: | Capital flows; Capital market imperfections; Capital mobility; Capital transfers; Current account deficits; Current account imbalances; Exchange rate; Feldstein-Horioka Paradox; Feldstein-Horioka Puzzle;Financial frictions; Financial market imperfections; Globalization; Goods market imperfections; International capital flows; International capital mobility; International financial markets; Investment; Marginal product of capital; MPK; Net capital transfers; Open economy macroeconomics; Rate of return on capital; Saving; saving-investment correlations; Tariffs; Trade barriers; Trade costs; Trade deficits; Trade frictions; Trade imbalances; Trade policy; Trump tariffs; World interest rate |
| JEL: | E43 F13 F21 F32 F41 F62 G15 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:kob:dpaper:dp2025-31 |
| By: | John Beirne (Asian Development Bank); Nuobu Renzhi (Capital University of Economics and Business in Beijing) |
| Abstract: | This paper examines the effects of country-specific geopolitical risk on capital flow volatility and asset markets across 29 emerging and advanced economies over the period 2000–2023. Using panel regressions and a panel structural vector autoregression framework, the results show that geopolitical risk raises bond yields and leads to exchange rate depreciation, with stronger and more persistent effects in emerging economies. Asset markets for advanced economies are affected mainly through lower equity prices. The impact on capital flow volatility is slightly higher on average for advanced economies but remains more persistent for emerging economies. Greater financial development, higher central bank independence, and lower public debt mitigate the adverse effects of geopolitical risk on both capital flows and asset markets. These findings highlight the importance of strong macroeconomic fundamentals and institutional frameworks in building resilience against geopolitical shocks. |
| Keywords: | geopolitical risk;capital flow volatility;financial markets |
| JEL: | G15 G41 |
| Date: | 2025–11–21 |
| URL: | https://d.repec.org/n?u=RePEc:ris:adbewp:021786 |
| By: | Yang Zhou (Graduate School of Economics, Nagoya City University, JAPAN); Shigeto Kitano (Research Institute for Economics and Business Administration, Kobe University, JAPAN) |
| Abstract: | Do geopolitical risks affect the occurrence of "extreme capital flow episodes"? Using a panel of 57 economies from 1986Q1 to 2023Q4, we examine the effects of both global and country-specific geopolitical risks on the occurrence of the four types of extreme capital episodes ("surge", "stop", "flight", and "retrenchment"). We find no association between global geopolitical risks and the occurrence of extreme capital flow episodes for advanced economies and only a weak association for emerging economies. In contrast, country-specific geopolitical risks show no significant association for advanced economies but a significant association for emerging economies. Our results suggest that when country-specific geopolitical risk is high, an emerging economy is more likely to experience stop, flight, and retrenchment episodes and less likely to experience surge episodes, reflecting heightened risk perceptions among both domestic and foreign investors. For each episode, we further identify its key underlying flow type: banking flows for flight, direct investment flows for stop, and banking, debt, and equity flows for retrenchment. We also find that country specific geopolitical risks became a more important driver of these episodes after the global financial crisis. These findings are robust to incorporating additional economic uncertainty indices, to excluding or adding certain control variables, to removing periods of dramatic global geopolitical risk fluctuations, and to employing alternative econometric methodologies. |
| Keywords: | Global geopolitical risk; Country-specific geopolitical Risk; Extreme capital flow episodes; Emerging economies; Flight-to-safety; Flighthome effects |
| JEL: | E44 F32 F51 G28 G32 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:kob:dpaper:dp2025-32 |
| By: | Gergő Motyovszki |
| Abstract: | US trade policy has taken a sharp protectionist turn under the second Trump administration, with the aim of boosting domestic manufacturing production, reducing the US trade deficit, and raising budgetary revenues ”paid by foreigners.” This paper assesses the macroeconomic consequences of recent US tariff announcements, based on quantitative simulations by the European Commission’s multi-region New Keynesian DSGE model, QUEST. Results indicate that, rather than aiding domestic production, tariff hikes weaken the US economy. While tariffs shift demand from imports towards US-produced goods, they also act as an adverse supply shock. In addition, the equilibrium terms-of-trade appreciation crowds out exports, and monetary tightening in response to inflationary pressures hurts domestic demand as well. Although tariff revenues generate additional fiscal space for the US government, only around a quarter of the burden falls on foreigners in the form of a US terms-of-trade gain. Finally, tariff hikes reduce US trade deficits only temporarily. The effects on EU GDP are moderately negative, driven mainly by weaker exports to the US. At the same time European exporters gain market share in third countries at the expense of less competitive American firms. US tariffs on other countries lead to trade diversion, slightly deepening the short-term economic losses in Europe, but reversing later on. A general tit-for-tat retaliation would deepen the negative impacts in both the US and the EU. Beyond the direct effects of tariffs, rising uncertainty and a loss of investor confidence in the US economy further aggravates the adverse economic consequences by tightening financing conditions. Sensitivity analyses highlight the role of tariff persistence, the currency of trade invoicing and the monetary policy response. |
| JEL: | E62 F13 F41 F42 F47 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:euf:dispap:234 |
| By: | Ryoji Ohdoi (School of Economics, Kwansei Gakuin University) |
| Abstract: | This paper studies how international asymmetries in population aging shape cross-country technology gaps and global growth. I develop a two-country, two-sector overlapping-generations model with endogenous technological progress free from scale effects. The analysis shows that, in the long-run equilibrium, the faster-aging country's relative technology declines through two mechanisms: reduced per capita labor supply and a reallocation of employment toward the non-tradable sector. Consequently, policies aimed solely at increasing labor-force participation are insufficient to prevent such relative technological decline, because the latter mechanism persists. Numerical simulations confirm these mechanisms and reveal potentially non-monotonic effects on global growth under large demographic asymmetries. I also quantify Japan's relative technological decline due solely to differential aging by calibrating the two countries to Japan and the United States. |
| Keywords: | International asymmetries in population aging; Overlapping generations; Endogenous technological progress without scale effects; Non-tradable goods; Sectoral reallocation |
| JEL: | F43 J11 O30 O41 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:kgu:wpaper:302 |
| By: | Matthias Burgert; Matthieu Darracq Pariès; Luigi Durand; Mario Gonzalez; Romanos Priftis; Oke Röhe; Matthias Rottner; Edgar Silgado-Gómez; Nikolai Stähler; Janos Varga |
| Abstract: | This paper presents a novel model comparison to examine the challenges posed by changes in carbon-intensive energy prices for monetary policy. The employed environmental monetary models have a detailed multi-sector structure. The comparison assesses the effects of both a temporary and a permanent energy price increase with a particular focus on the euro area and the United States. Temporary and permanent price shocks are both inflationary. However, the inflationary impact of the permanent shock depends on the underlying model assumptions and monetary policy response. The analysis also establishes that these models share large commonalities in their quantitative and qualitative results, while also pointing out cross-country differences. |
| Keywords: | climate change, monetary policy, multi-sector models, model comparison, DSGE models |
| JEL: | C54 E52 H23 Q43 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1313 |