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on Open Economy Macroeconomics |
| By: | Di Iorio Juan Pablo |
| 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. |
| JEL: | F4 E6 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:aep:anales:4794 |
| By: | Domínguez Juan Ignacio |
| Abstract: | Exchange controls are a common policy tool in emerging economies. This study develops a tractable model with capital accumulation to formalize their macroeconomic consequences in an environment where the government finances its deficit through domestic credit expansion while maintaining a fixed exchange rate. The analysis shows that exchange controls generate a wedge between official and parallel exchange rates, reduce output and permanent consumption, and, under certain conditions, tighter import restrictions can increase money demand and delay the collapse of the fixed rate regime. Moreover, the share of legal exports declines as the exchange rate gap widens. When import restrictions are endogenously adjusted in response to the amount of legal exports, domestic prices rise persistently over time. The main contributions are: (i) formalizing and summarizing the effects of exchange controls in a tractable model with capital accumulation and monetized deficits under a fixed exchange rate, and (ii) identifying a money-demand channel through which import restrictions can influence the timing of a first generation balance-of-payments crisis. |
| JEL: | F31 F41 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:aep:anales:4795 |
| By: | Silvia Miranda-Agrippino; Tsvetelina Nenova; Hélène Rey |
| Abstract: | Using a novel indicator for the People's Bank of China monetary policy stance, we estimate a policy rule that accounts for the dual nature of its price stability mandate—encompassing domestic inflation and the exchange rate—and for the evolution of its operational framework. The “Ins”: The domestic transmission follows textbook patterns, with exceptions due to the active management of the renminbi and the financial account. The "Outs": International spillovers are powerful and affect commodity markets, global production and trade. The pass-through to foreign (US) prices is substantial. Financial spillovers are second-order, and mostly derivative from trade spillovers. |
| JEL: | E50 F3 F4 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34626 |
| By: | Marinelli Gaston |
| Abstract: | This paper shows how global dollar appreciations transmit to emerging market and developing economies (EMDEs) through commodity prices and country risk. Using quarterly data for 22 EMDEs from 1999–2019, I combine the Obstfeld & Zhou (2023) dataset with country-specific commodity price indices and classify countries as commodity exporters or importers via a trade-balance rule. Global dollar appreciation shocks explain up to 16% of the forecast-error variance of commodity terms of trade (CToT) and up to 9% of EMBI spreads. A global dollar appreciation depreciates EMDE currencies, raises EMBI, depresses investment, and lowers GDP, with muted CPI effects. Stratifying by commodity status reveals sharp heterogeneity: exporters suffer larger and more persistent adverse responses, while importers seem stable. To uncover mechanisms, I implement an approach `a la Cloyne–Jord`a–Taylor (2023) to estimate indirect effects. A more favorable CToT response mitigates output and demand contractions, whereas higher commodity import prices and larger EMBI responses amplify adverse outcomes. |
| JEL: | F4 C3 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:aep:anales:4818 |
| By: | Maria Manuel Campos; José Miguel Cardoso da Costa; Sandra Gomes; Pascal Jacquinot |
| Abstract: | This paper studies the effect of alternative monetary policy responses and the implementation of different fiscal policy measures to an inflationary shock in a monetary union, through the lens of a global DSGE model calibrated to the euro area. We find that a more aggressive monetary policy response mitigates the inflation surge, but has a detrimental impact on economic activity that imposes a stronger increase of public debt, reducing the fiscal policy space. We also find that some fiscal policy measures may alleviate the negative impact of the shock on households and firms, but do not significantly alter the inflation dynamics: a reduction of consumption taxes reduces inflation only temporarily, while an increase of transfers or of public investment slightly increase inflation initially, even if the latter may have a protracted negative impact. Overall, an appropriate mix of monetary and fiscal policies may be needed to ensure a swift return of inflation to target, while mitigating the impact on consumption. Targeting transfers to support constrained households has a mild impact on inflation, but may be a way to mitigate the impact on the most vulnerable with a less detrimental effect on public debt. |
| JEL: | E52 E62 E63 F45 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ptu:wpaper:w202515 |
| By: | Luttini, Emiliano Evaristo; Mekonnen, Dawit Kelemework; Mercer-Blackman, Valerie; Sorensen, Bent |
| Abstract: | Commodity-exporting countries face important challenges in shielding their economies from commodity price volatility. In an ideal world, a country would buy and sell foreign assets to insure itself against volatility caused by the destabilizing economic impact of gross domestic product fluctuations over time. The literature on the topic, which has mainly focused on risk sharing across advanced economies, has found a puzzlingly low amount of risk sharing. Using a sample of 110 countries between 1995 and 2019, this paper finds that commodity exporters share 46 percent of their risk as a group internationally, significantly more so than non-commodity exporters, which share about 33 percent of their risk. The greater the volatility of commodity terms of trade, the more a country shares risk internationally. Consequently, energy and metals exporters share risk more than agricultural exporters. Government saving is the main risk-sharing mechanism in commodity-exporting and non-exporting countries, although it is more important for commodity exporters. Commodity-exporting countries are also more likely to smooth gross domestic product fluctuations through net purchases of assets abroad, while non-commodity exporters tend to self-insure through procyclical domestic investment. |
| Date: | 2026–01–14 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:11296 |
| By: | Benjamin Jungmann; Eckhard Hein; Juan Manuel Campana |
| Abstract: | Post-Keynesian conflict inflation models have received renewed attention in the course of the recent inflationary processes related to the recovery from the Covid-19 crisis in 2020 and the hike of energy prices in the context of the start of the Russian war on Ukraine in 2022. Although the basic principles of conflict inflation can be presented in a closed economy framework (e.g. Hein 2023, chap. 5), examining current sources and triggers of inflation requires open economy models. Post-Keynesian economics has presented several of these models (e.g. Blecker 2011, Vera 2014, Bastian and Setterfield 2020), which differ in the role assigned to the nominal and the real exchange rate (RER), on the one hand, and the stability of the wage and price Phillips curves, on the other hand. This paper first provides a systematic overview of post-Keynesian open economy conflict inflation models using the treatment of the RER and the stability of the Phillips curve as the main clustering criteria. Second, it provides a model including an unstable Phillips curve and a policy rule targeting a certain RER in response towards trade imbalances. The model distinguishes three equilibrium rates of employment: the goods market equilibrium rate of employment, the distribution claims equilibrium and hence stable inflation rate of employment, and finally the external balance equilibrium rate of employment. The interaction of these three rates drives the system. Finally, the model examines the conditions for an overall equilibrium and its stability. |
| Keywords: | conflict inflation, open economy, exchange rate policy, post-Keynesian model |
| JEL: | E12 E31 E61 F41 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:imk:fmmpap:120-2025 |
| By: | Luttini, Emiliano; Mekonnen, Dawit; Mercer-Blackman, Valerie; Sørensen, Bent |
| Abstract: | Using world-commodity prices as an instrument, we propose a novel method for decomposing channels of international risk sharing for commodity-exporting countries. We identify the commodity “sector” as the projection of GDP growth on commodity price growth and the non-commodity “sector” as its orthogonal complement. We find that commodity price risk is shared significantly more than other risk in resource-rich countries. Shocks to GDP are smoothed via pro-cyclical savings, especially government savings, and counter-cyclical international factor income. Risk sharing from government savings is stronger at shorter than at longer time horizons. |
| Keywords: | International Development |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ags:aaea25:361019 |
| By: | Guido Ianni |
| Abstract: | This paper extends the classical surplus approach to value and distribution to an open economy framework with an arbitrary number of commodities and explicitly allowing for persistent profit rate differentials across countries. The analysis builds upon Sraffa’s price equations, incorporating inter-industry linkages between two trading nations. We derive the wage curve for an open economy, demonstrating that while the closed-economy wage-profit relation is a one-dimensional curve, its open-economy counterpart forms a higher dimensional surface with additional degrees of freedom. This structural difference implies that distributive closures play a more significant role in open economies, as profit and wage rates in one country are no longer uniquely tied together. Our results highlight the geopolitical dimension of class struggle, showing that domestic wage and profit rate adjustments can have significant spillover effects on the global distribution of surplus. |
| Keywords: | open economy; income distribution; wage curve |
| JEL: | B51 C67 F10 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:ris:sraffa:022046 |
| By: | Ferrari Minesso, Massimo; Siena, Daniele |
| Abstract: | This paper studies the international macro-financial implications of U.S. dollar-backed payment stablecoins. These digital assets create a new global safe asset channel that links private money creation and global payment needs directly to U.S. public debt. By reshaping the demand for safe assets and the geography of dollar intermediation, stablecoins transform the dynamics of global financial markets, generating new trade-offs, also for the U.S.: even if they widen the dollar’s global footprint and compress U.S. risk-free yields, they entail non-trivial macro-financial costs. Stablecoins dampen the domestic real effects of U.S. monetary policy and increase both U.S. and foreign exposure to cross-country shocks, making a more digital, dollar-centric reserve system less stable. These effects are limited at low adoption levels but rise non-linearly with stablecoin capitalization, reshaping the functioning of the international financial system. JEL Classification: G15, E42, E44, E52, F3 |
| Keywords: | financial stability, global safe asset, monetary policy, spillovers, stablecoins |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263174 |
| By: | Orhun Ozel |
| Abstract: | This study examines the import intensities of Turkish manufacturing firms following a large exchange rate shock. It focuses on the heterogeneities between exporters and domestic sellers in a difference-in-differences setup. The findings suggest that the exchange rate shock caused significant reductions in the import intensities of the investigated firms. The sudden depreciation affected domestic sellers considerably more than exporters, forcing them to decrease their imports and turn to local alternatives more than exporters. The study further explores the reasons for the differentiation by analyzing various firm characteristics. The results suggest that the difference between domestic sellers and exporters is prevalent for high technology sectors, for firms producing more complex products, and for firms producing lower domestic value-added products. In these groups, exporters do not switch to local alternatives as much as domestic sellers. The decision to switch to domestic alternatives is sensitive to the existence of suitable domestic substitutes for currently imported intermediate inputs, especially for exporters. Drawing on these findings, the paper attempts to make a macro-level inference about the import demand function in Türkiye and arrives at an estimate of 0.51 for the exchange rate elasticity of imports. |
| Keywords: | Trade balance, Import demand function, Exchange rate shock, Difference-in-differences, Heterogeneous firms |
| JEL: | F14 F31 F49 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:tcb:wpaper:2518 |
| By: | Cwik, Tobias; Winter, Christoph |
| Abstract: | In the aftermath of the Great Financial Crisis, central banks from several advanced, small, open economies have used FX interventions (FXI) in order to stimulate inflation, given that their policy rates were very low. We present a quantitative DSGE model that allows us to study the effectiveness of this unconventional monetary policy tool. We apply the model to Switzerland, a country that has seen frequent and sizable central bank interventions. The model implies that FXI are effective and long-lasting: FXI of approximately CHF 27 billion (5% of annual GDP) are necessary to prevent the Swiss franc from appreciating by 1.1%. The effect is stronger the longer the central bank can commit to keep its policy rate constant in response to the inflationary effect of the interventions. We also find that FXI create significant additional leeway for monetary policy in small, open economies. This effect can be shown by the "shadow rate", the policy rate required to keep CPI inflation on its realised path without FXI. This "shadow rate" was up to 1 pp below the realised policy rate and close to -1.5% from 2015 to mid-2022 in Switzerland. Our framework also allows us to study the sensitivity of the shadow rate in an environment in which the policy rate is at (or close to) its lower bound. If the persistence of the policy rate increases at the lower bound, the shadow rate rises in absolute terms. |
| Keywords: | Monetary policy, FX intervention, shadow rate, DSGE model |
| JEL: | C54 E52 F41 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:imfswp:335029 |
| By: | Jesús Fernández-Villaverde; Tomohide Mineyama; Dongho Song |
| 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. |
| JEL: | D57 D58 D63 D72 F1 F2 F4 F6 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34672 |