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on Open Economy Macroeconomics |
| By: | Johannes Eugster; Giovanni Rosso; Pinar Yesin |
| Abstract: | This paper investigates the interaction between the rise of inelastic intermediaries, e.g. mutual funds and exchange traded funds (ETFs), and exchange rate dynamics. By leveraging regulatory microdata on the universe of mutual funds domiciled in Switzerland, we first document the remarkable rise of the market share of this industry. Mutual funds went from holding 5% of domestic currency fixed income instruments in 2005 to 51% in 2024. We show that these intermediaries have strict mandates and trade only when faced with in(out)-flows. This makes the market more price-inelastic on aggregate in response to asset demand shocks. We develop an analytical model that we bring to the microdata. We find that (i) an inflow into domestic mutual funds with a large portfolio weight on the domestic currency appreciates it and (ii) the reduced aggregate elasticity makes the exchange rate more sensitive to capital flows. Finally, using a weekly panel of five advanced economies, we document the external validity of this mechanism. We show that the currencies whose markets see a higher prevalence of inelastic intermediaries react significantly more strongly to capital inflows. |
| Keywords: | Inelastic intermediaries, Mutual funds, Exchange rate dynamics, Capital flows |
| JEL: | F31 G23 G15 F21 E44 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:snb:snbwpa:2025-17 |
| By: | Ziran Ding (University of St Andrews); Adam Hal Spencer (University of Bonn); Zinan Wang (Tianjin University) |
| Abstract: | Amid ongoing geoeconomic tensions, industrial policy has emerged as a prominent tool for policymakers. What are the dynamic and welfare effects of these policies? How does the short-sightedness of policymakers influence their choice of instruments? What are the distributional consequences of these protectionist measures? We address these questions with a dynamic two-country general equilibrium framework that incorporates firm heterogeneity, trade, and the offshoring of tasks. By calibrating the model to the contexts of the US and China, we explore the effects of three popular industrial policies: import tariffs, domestic production subsidies, and entry subsidies. Our findings indicate that, from an initial state free of interventions, myopic policymakers are incentivized to subsidize production, while more forward-looking ones favor imposing import tariffs. Although all of these policies initially reduce wage inequality, some result in aggregate welfare losses, either in the short run or the long run. |
| Keywords: | Macroeconomic dynamics; Firm heterogeneity; Trade; Trade-in-tasks; Industrial policies; Welfare; Global value chains |
| JEL: | F23 F41 F51 F62 L51 |
| Date: | 2024–11–26 |
| URL: | https://d.repec.org/n?u=RePEc:san:econdp:2504 |
| By: | Horioka, Charles Yuji; Ford, Nicholas |
| 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, FeldsteinHorioka 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 |
| URL: | https://d.repec.org/n?u=RePEc:agi:wpaper:02000257 |
| By: | Hongyan Zhao |
| Abstract: | This paper develops a multi-country, multi-sector trade model with input-output linkages to analyze the global macroeconomic effects of the United States'(US) 2025 tariff policies. The model incorporates endogenous labor supply and captures the transmission of tariff-induced shocks through global value chains (GVCs). By simulating both short-run and long-run adjustments, the analysis demonstrates how trade shocks are amplified by sectoral interdependence and labor market dynamics. The results reveal substantial short-run output losses and inflationary pressures, especially for economies deeply integrated into US supply chains, while long-run reallocations partially mitigate-but do not fully offset-these impacts. |
| Keywords: | tariffs, global supply chains, inflation, output, trade war |
| JEL: | F13 F41 E31 C68 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1316 |
| By: | Juan Pablo Di Iorio (Department of Economics, Universidad de San Andrés) |
| Abstract: | This study examines the effects of incorporating fiscal dominance, based on the Fiscal Theory of the Price Level, into a New Keynesian Small Open Economy (NK-SOE) model. This framework enables a comparison between the responses of an economy characterized by fiscal dominance and those of canonical NK-SOE models when faced with monetary or external shocks. Notable differences emerge in nominal variables, such as inflation rates and nominal devaluation, as well as in household consumption and the real exchange rate. I show that introducing fiscal dominance into an otherwise standard NK-SOE model can help explain two important puzzles in the literature:the “price puzzle” and the “exchange rate response puzzle.” Furthermore, the model is expanded to account for government debt issued in foreign currency, introducing a fiscal channel related to the currency composition of the government’s debt.Additionally, the structure of taxes and government expenditures—particularly fiscal revenues tied to the non-tradable sector—plays a significant role in shaping the economic response when the government issues debt in foreign currency. |
| Keywords: | - |
| JEL: | E31 E43 E62 F31 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:sad:ypaper:19 |
| By: | Sarthak Behera; Hyeongwoo Kim; Soohyon Kim |
| Abstract: | This paper investigates the asymmetric out-of-sample predictability of macroeconomic variables for the real exchange rate between the United States and Korea. While conventional models often suggest that the bilateral real exchange rate is primarily driven by the relative economic performance of the two countries, our research highlights the superior predictive power of latent factors obtained from U.S. economic variables, while Korean factors fail to enhance predictability and often act as noise. We attribute the strong predictability of U.S. factors to significant cross-correlations observed among a panel of bilateral real exchange rates vis-\`a-vis the U.S. dollar, indicating a limited role for idiosyncratic factors associated with smaller economies. Our major findings are based on data from the pre-COVID19 era. We further explore how economic crises disrupt this relationship, resulting in temporary yet persistent disconnects between the real exchange rate and macroeconomic fundamentals. |
| Keywords: | Dollar/Won Real Exchange Rate; Asymmetric Predictability; Principal Component Analysis; Partial Least Squares; LASSO; Out-of-Sample Forecast |
| JEL: | C38 C53 C55 F31 G17 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:abn:wpaper:auwp2026-01 |
| By: | Hakhverdyan, Davit; Kalantaryan, Hayk |
| Abstract: | The complex nature of international capital flows remains a central topic in academic debate. Despite extensive research, the relationship between capital inflows and financial system vulnerabilities remains complex and influenced by both global, regional and domestic factors that necessitate nuanced approaches when considering such relationships. This paper contributes to the ongoing debate by shedding light on the buildup of financial vulnerabilities stemming from capital inflows. Using a panel dataset covering 128 advanced and emerging economies and employing two-stage GMM estimation techniques, the paper examines the channels through which cross-border capital inflows contribute to financial vulnerability build-up. Our findings suggest that capital inflows, namely portfolio and cross-border bank inflows, remain a key driver of credit expansion and positively influence the risk-taking behaviour of commercial banks. Importantly, the underlying drivers of these flows are also critical in explaining such vulnerabilities. By using regional flows as an instrument for capital flows, we emphasise the role of regional and pull factors, while the distinction between natural-level and gap-driven inflows in the paper highlights important policy implications for economies exposed to external shocks. Finally, we find that capital flow control measures play a mitigating role in vulnerability build-up associated with external financing. |
| Keywords: | capital flows, cross-border bank flows, portfolio flows, financial vulnerability, credit growth, capital adequacy, capital controls, regional flows, pull factors, natural level of capital |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:opodis:333913 |
| By: | Ricardo Correa; Andrea Fabiani; Matias Ossandon Busch; Miguel Sarmiento |
| Abstract: | We study the role that cross-border firm-to-firm credit plays in financing exporters. Exploiting the exogenous shock of US tariffs on Chinese goods in 2018–2019, we examine the response of Colombian firms – bystanders not targeted by trade policy – to redirected US demand. Using credit registry information for cross-border and domestic non-financial firm financing, we find that almost 40 percent of the total credit sourced by exporters came from cross-border firm-to-firm credit at end-2019, which represented 80 percent of their cross-border credit. In contrast to traditional trade credit, which is typically short-term, firm-to-firm credit has an average maturity of almost 2 years, and has characteristics resembling bank lending. Our findings highlight an overlooked financial channel underpinning the international trade network. |
| Keywords: | trade disruptions, cross-border credit, firm-to-firm credit, global value chains |
| JEL: | G21 F34 F42 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1315 |
| By: | Ma, Chang; Rebucci, Alessandro; Zhou, Sili |
| 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. |
| Keywords: | QDII Funds, Chinese Monetary Policy, Household Rebalancing, Foreign Portfolio Equity Flows |
| JEL: | F30 G10 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofitp:333958 |
| By: | Kang, Minseong; Lee, Seungki |
| Abstract: | This paper presents a novel approach to estimating the cost pass-through between imported crop prices and domestic food prices in a small open economy through firm markups. Our approach differentiates from the existing studies by enabling the estimation of firm-level pass-through elasticities for imported crop prices. Using proprietary firm-level financial data combined with public information on imports and subsector-specific usage of 8 major crops, we study firms in the 9 sectors comprising the South Korean food industry over the 2000-2021 period. Our findings include markup polarization across firms with a particular increase in higher markup firms. We also observe considerable heterogeneity in cost pass-through elasticity across sectors and markets: ranging from 0.085 to 0.510. Additionally, our measurements reveal a growing pass-through tendency in recent years, suggesting that global crop price shocks will likely have a more substantial impact on the food supply chain in South Korea |
| Keywords: | Agricultural and Food Policy, Demand and Price Analysis |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ags:nccc24:379007 |
| By: | Martin McCarthy (Reserve Bank of Australia); Stephen Snudden (Wilfrid Laurier University) |
| Abstract: | Forecasting period-average exchange rates requires using high-frequency data to efficiently construct forecasts and to test the accuracy of these forecasts against the traditional random walk hypothesis. To achieve this, we construct the first real-time dataset of daily effective exchange rates for all available countries, both nominal and real. The real-time vintages account for the typical delay in the publication of trade weights and inflation. Our findings indicate that forecasts constructed with daily data can significantly improve accuracy, up to 40 per cent compared to using monthly averages. We also find that unlike bilateral exchange rates, daily effective exchange rates exhibit properties distinct from random walk processes. When applying efficient estimation and testing methods made possible for the first time by the daily data, we find new evidence of real-time predictability for effective exchange rates in up to fifty per cent of countries. |
| Keywords: | temporal aggregation; exchange rates; forecasting; forecast evaluation; high-frequency data |
| JEL: | C43 C5 F31 F37 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:rba:rbardp:rdp2025-09 |
| By: | Jorge Miranda-Pinto; Eugenio I. Rojas; Felipe Saffie; Alvaro Silva |
| Abstract: | We study how production networks shape the severity of Sudden Stops. We build a small open economy model with collateral constraints and input–output linkages, derive a sufficient statistic that maps network structure into the amplification of tradable shocks, and show that a planner optimally introduces sectoral wedges to reduce amplification. Using OECD input–output data and Sudden Stop episodes, we document systematic network differences between emerging and advanced economies and show they predict crisis severity. A calibrated three-sector DSGE model disciplined by these differences reveals that endowing an advanced economy with an emerging-market production network moves most of the way toward the observed emerging–advanced Sudden Stop gap. |
| JEL: | E32 F32 G01 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34604 |