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on Open Economy Macroeconomics |
| By: | Mark A. Aguiar; Oleg Itskhoki; Dmitry Mukhin |
| Abstract: | We revisit whether global output is (Pareto) efficiently distributed across countries over time. The efficient allocation of goods across regions requires that the relative marginal utilities of consumption across countries comoves with the relative costs of the country-specific consumption bundles. Standard approaches to evaluating this property exploit the Welfare Theorems and equate the observed real exchange rate with the social relative costs of consumption. Given the large literature documenting the disconnect between exchange rates, relative prices faced by consumers in a given market, and relative quantities consumed, we develop a methodology that measures relative costs that is robust to this disconnect. We find that relative consumption growth across regions is significantly more correlated with our computed shadow prices than it is with observed real exchange rates, suggesting an allocation closer to efficient risk sharing. Moreover, we provide a decentralization that matches observed prices and quantities, enabling us to rationalize the better implied risk sharing with the failure of the standard correlations. The decentralization involves a combination of segmented foreign exchange markets and pricing-to-market behavior in goods markets. The model implies that consumption allocations are insulated from excess fluctuations in the exchange rate via the equilibrium pricing behavior of exporters. |
| JEL: | F3 F4 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34587 |
| By: | Roger Hammersland; Dag Kolsrud (Statistics Norway) |
| Abstract: | Building on a New Keynesian rational expectations framework, we develop a structural empirical model that jointly determines the real exchange rate, inflation, and the nominal interest rate in a small open economy. Employing a full-information system design and estimation approach that avoids imposing unduly restrictive a priori parameter constraints, we identify a forward-looking Phillips curve while addressing simultaneity bias. Our empirical findings reveal persistent exchange rate dynamics that diverge from New Keynesian rational expectations but align with prior evidence, suggesting the presence of multiple equilibria. |
| Keywords: | New Keynesian Phillips curve; structural time series modeling; simultaneous model design and estimation |
| JEL: | C32 C51 E12 E31 F41 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:ssb:dispap:1026 |
| By: | Adarov, Amat; Kose, Ayhan M.; Vorisek, Dana |
| Abstract: | The world faces a pressing challenge to meet key development objectives amid slowing growth and rising macroeconomic and geopolitical risks. With the number of job seekers rising rapidly, infrastructure shortfalls continuing to be large, and climate costs mounting, the case for a significant investment push has never been stronger. Yet the capacity to respond in many emerging market and developing economies (EMDEs) has eroded. Since the global financial crisis, investment growth has slowed to about half its pace in the 2000s, with both public and private investment weakening. Foreign direct investment inflows—a critical source of capital, technology, and managerial know-how—have also fallen sharply and become increasingly concentrated, leaving low-income countries (LICs) with only a marginal share. The risks of further retrenchment are significant, as trade tensions, policy uncertainty, and elevated debt levels continue to weigh on investment. Reigniting momentum will require ambitious domestic reforms to strengthen institutions, rebuild macro-fiscal stability, and deepen trade and investment integration—the foundations of a supportive business climate. At the same time, international cooperation is indispensable. A renewed commitment to a predictable system of cross-border trade and investment flows, combined with scaled-up financial support and sustained technical assistance, is essential to help EMDEs—especially LICs and economies in fragile and conflict situations—bridge financing gaps and implement the domestic reforms needed to restore investment as an engine of growth, jobs, and development. |
| Keywords: | investment; gross fixed capital formation; private investment; public investment; foreign direct investment; structural reforms; economic growth |
| JEL: | E22 F21 F4 F6 O1 O4 |
| Date: | 2025–12–16 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:127367 |
| By: | Victor Almeida; Carlos Esquivel; Timothy J. Kehoe; Juan Pablo Nicolini |
| Abstract: | We develop a sovereign default model with debt renegotiation in which interest-rate shocks affect default incentives through two mechanisms. Under the standard mechanism, higher interest rates tighten the government’s budget constraint. Under the renegotiation mechanism, higher rates increase lenders’ opportunity cost of holding delinquent debt, which makes lenders accept larger haircuts and makes default more attractive for the government. We argue that our novel renegotiation mechanism reconciles standard sovereign default models with the narrative that the sharp increase in the real interest rate in the United States was a relevant factor in the defaults of the early 1980s. |
| JEL: | F34 F41 G28 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34555 |
| By: | Jesús Fernández-Villaverde (University of Pennsylvania); Tomohide Mineyama (International Monetary Fund); Dongho Song (Johns Hopkins University) |
| Abstract: | We study how uneven gains from globalization can endogenously generate protectionism as a political equilibrium. Using U.S. data, we document that regions more exposed to import competition display stronger opposition to globalization, especially among households with little financial wealth, and that firms in trade-exposed sectors sharply increase lobbying expenditures. To interpret these patterns, we develop and quantify a general equilibrium Ricardian model with heterogeneous households, input–output linkages, and endogenous trade policy shaped by voting and lobbying. Distributional shocks reallocate political support among voters, while lobbying propagates through production networks, generating strategic complementarities that sustain protectionism. Calibrated to U.S.–China sectoral data from 1991–2019, the model accounts for rising inequality, declining support for globalization, and key aggregate trends in consumption and trade. |
| Keywords: | Globalization, heterogeneous households, multi-sector, production network, Ricardian trade, voting, political lobbying |
| JEL: | D57 D58 D63 D72 F1 F2 F4 F6 |
| Date: | 2026–04–01 |
| URL: | https://d.repec.org/n?u=RePEc:pen:papers:26-001 |
| By: | António Afonso; José Alves; João Jalles; Sofia Monteiro |
| Abstract: | Climate change is reshaping sovereign risk and macroeconomic stability by amplifying fiscal and external fragilities. This paper develops a unified framework to assess how climate vulnerability and resilience jointly influence fiscal–external solvency. We construct a market-based sustainability index that integrates time-varying fiscal and external reaction coefficients – estimated using Schlicht’s (2021) method-weighted by sovereign yields. Using a global panel of more than 60 economies (1981–2024), we document four key findings. First, structural vulnerability exerts a large and persistent drag on sustainability, even after controlling for macro fundamentals, as higher exposure magnifies expected losses and tightens financing conditions. Second, resilience does not display a strong unconditional effect but significantly mitigates the adverse impact of vulnerability, acting as a state-contingent stabilizer. Third, local projections with smooth transition (LP-STAR) reveal sharp nonlinearities: identical climate shocks trigger modest, short-lived effects in low-vulnerability or high-resilience regimes but cause deep and persistent deterioration when vulnerability is high and resilience weak. Fourth, these dynamics generate an “adaptation trap” – a self-reinforcing cycle where vulnerability raises yields, yields compress fiscal space, and limited adaptation perpetuates vulnerability. Policy implications are clear: resilience investment yields sizable macrofinancial returns by reducing expected losses and compressing climate risk premia, while delaying adaptation risks entrenching fragility. Our results highlight the need to embed climate parameters into debt sustainability analyses and sovereign risk frameworks, particularly for emerging markets facing tighter financing constraints. |
| Keywords: | Climate vulnerability; Climate resilience; Fiscal sustainability; External sustainability; Sovereign risk premia. |
| JEL: | C33 E62 F34 H63 Q54 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:ise:remwps:wp04002026 |
| By: | Marie-Claude Beaulieu (Département de finance, assurance et immobilier, Université Laval and research fellow at CRREP (Centre de recherche sur les risques, les enjeux économiques, et les politiques publiques), Holder of Chaire RBC en innovations financières); Marie-Hélène Gagnon (Département de finance, assurance et immobilier, Université Laval and research fellow at CRREP (Centre de recherche sur les risques, les enjeux économiques, et les politiques publiques)); Céline Gimet (Sciences Po Aix, Aix Marseille Univ, CNRS, AMSE, Marseille, France) |
| Abstract: | This paper studies the main determinants of bilateral financial flows in the euro area to achieve sustainable and fair financing opportunities. We revisit the modern theory of the optimal currency area considering the impact of heterogeneity in inequality measures, within and across countries, on crossborder financial flows. To do so, we introduce financial and social fragmentation in gravity models of European capital flows. We use data from 19 Eurozone countries from 2000 to 2021 and show how fragmentation impacts capital flows, namely foreign direct investment, cross-border loans as well as portfolios, equity and bond flows. Since capital is, in principle, free to flow in the Eurozone, our analysis directly identifies the roles of potential sources of fragmentation: social inequalities, lack of market openness, and domestic regulations such as macroprudential controls. Overall, our results show that financial integration in Europe entails more capital flows of any type while social fragmentation across European countries is detrimental to capital flows, no matter which type. This is strong evidence of the importance of financial and social fragmentation in the Eurozone on the distribution of capital. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:aim:wpaimx:2531 |
| By: | Nils Gornemann; Eugenio I. Rojas; Felipe Saffie |
| Abstract: | We document that rising volatility in U.S. interest rates, a key dimension of global financial risk, notably depresses the trend of economic activity in emerging market economies (EMEs) but not in advanced economies (AEs). Using a panel state-space model, we show that a one standard- deviation shock to U.S. monetary policy uncertainty permanently lowers the level of GDP in EMEs by about 25 basis points after three years, with negligible effects in AEs. We rationalize this fact in a small open economy model where firms borrow against future profits to finance innovation. Higher volatility compresses firm values, tightens collateral constraints, and endogenously slows productivity growth, especially when financial frictions are severe. |
| JEL: | F32 F41 G15 O16 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34595 |
| By: | Samuel Martinez; Daniel Ventosa-Santaulària (Aix-Marseille Univ., CNRS, AMSE, Marseille, France) |
| Abstract: | Exchange rate pass-through (ERPT) is a key channel through which external shocks affect domestic inflation in open emerging market economies (EMEs). This paper estimates ERPT for Mexico using local projections with an instrumental-variable strategy to trace the cumulative effects of peso-dollar depreciations on consumer prices. The results indicate a relatively high degree of pass-through–higher than most estimates reported in the existing literature–suggesting that Mexican inflation responds more strongly to exchangerate movements than commonly assumed. Although price subcomponents display the expected heterogeneity (with goods showing the highest sensitivity and services the lowest), the main implication is clear: exchange-rate fluctuations remain a powerful driver of inflation dynamics, underscoring the policy relevance of monitoring currency volatility in open EMEs such as Mexico. |
| Keywords: | Inflation, Exchange rate pass-through, ERPT, EMEs, Mexico, Local projections |
| JEL: | E31 F14 F31 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:aim:wpaimx:2536 |
| By: | Kosuke Aoki; Alan Auerbach; Charles Yuji Horioka; Anil Kashyap; Tsutomu Watanabe; David Weinstein |
| Abstract: | Takatoshi Ito, who passed away in September 2025, was a leading scholar of macroeconomics and international finance. This column, written by a group of friends and colleagues, outlines his many contributions in a lifetime of research, teaching and policy-making in Japan, the United States and around the world. His work is particularly notable for challenging the widespread perception that standard economic analysis is somehow ill-suited for understanding the Japanese economy. Indeed, using the discipline’s rigorous tools, he illuminated challenges that Japan faced earlier and more acutely than other countries – including population decline and ageing, ballooning government debt, the zero lower bound and unconventional monetary policies, real estate bubbles and their collapse, and the banking sector’s problem of non-performing loans. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:dpr:wpaper:1298 |
| By: | Stefano Maria Corbellini (School of Economics, University of Sheffield, Sheffield S10 2TU, UK) |
| Abstract: | This paper analyzes the monetary policy trade-off between defending purchasing power of consumers and keeping moderate debt cost for borrowers, in the framework of a heterogeneous agent New Keynesian open economy hit by a foreign energy price shock. Raising the interest rate indeed combats the loss in purchasing power due to the energy shock through a real exchange rate appreciation: however, this comes at the expense of higher interest payments for debtors. The trade-off can be resolved by adopting a milder interest rate policy during the crisis in exchange for a prolonged contraction beyond the energy shock time span. This interest rate smoothing approach allows to still experience a real appreciation today, while spreading the impact on debt costs more evenly over time. This policy counterfactual is analyzed in a quantitative model of the UK economy under the 2022-2023 energy price hike, where the loss of consumers’ purchasing power and the vulnerability of mortgage costs to higher policy rates have been elements of paramount empirical relevance. |
| Keywords: | monetary policy, energy, heterogeneity, inequality, household debt |
| JEL: | D14 D31 E52 G21 G51 Q43 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:shf:wpaper:2025014 |
| By: | Alberto Botta |
| Abstract: | In this paper, we present a Balance-of-Payments (BoP)-constrained center-periphery growth model extended for the inclusion of international finance and the accumulation of external debt. With respect to previous works in this stream of literature, we show how the long-run BoP-constrained growth rate changes endogenously alongside the evolution of periphery’s external position. We describe a complex non-linear system that may feature multiple equilibria with different stability properties. A stable equilibrium characterized by high long-run BoP-constrained growth and low external indebtedness is paired with a saddle-path unstable one in which a more fragile external position associates with lower growth. We also show that periods of (temporary) financial “bonanza”, i.e., surges in foreign capital pouring into the economy, may modify the long-run growth trajectory of the periphery and its overall macro stability. Financial bonanza can boost economic growth in the short term. However, it can also give rise to tougher debt service payments and possibly lead to cases of premature de-industrialization. Despite short-term benefits, the periphery may well get worse off in the long run. If the financial boom is strong and protracted enough, it can even generate radical instability driving the periphery towards default on external debt. In the final part of the paper, we discuss the policy implications of the model, namely the role of capital controls as part of a broader development strategy aimed at taming finance-led instability and boosting structural change in the periphery. |
| Keywords: | External constraint; international capital; financial bonanza; premature de-industrialization |
| JEL: | E12 F43 F62 O11 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:pke:wpaper:pkwp2601 |