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on Open Economy Macroeconomics |
| By: | Enrique G. Mendoza; Vincenzo Quadrini |
| Abstract: | We study how the increased cross-country ownership of financial assets between advanced and emerging economies impacted their financial and macroeconomic volatility. While cross-country ownership improved risk-sharing and reduced volatility associated with financial crises, it also increased the exposure of countries to foreign crises, leading to higher international co-movement. Through quantitative applications of a two-region model representative of advanced and emerging economies, we find that financial globalization reduced volatility worldwide, but significantly more in emerging economies. |
| JEL: | F40 F41 G01 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34689 |
| By: | Martin Hodula; Simona Malovana |
| Abstract: | Do domestic or foreign interest rates matter more for investor behavior in a small open economy? This paper examines how domestic investors adjust mutual fund allocations in response to monetary policy shocks, using granular Czech mutual fund data from 2009 to 2023. Employing a local projection framework with an instrumental variables strategy, we show that fund flows react strongly to exogenous changes in interest rate differentials. Foreign monetary policy shocks are found to have a more pronounced effect than domestic ones. These responses occur almost exclusively through adjustments in inflows, with outflows remaining largely stable, indicating that monetary policy influences new allocations rather than causing redemptions. Exchange rate movements, economic sentiment, and fund liquidity further modulate these effects, making them stronger when the currency depreciates, sentiment is negative, or funds are less liquid. |
| Keywords: | Domestic investors, foreign monetary policy, interest rate differentials, liquidity, mutual fund flows, small open economy |
| JEL: | E44 E52 F32 G11 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:cnb:wpaper:2025/11 |
| By: | Enrique G. Mendoza; Vincenzo Quadrini |
| Abstract: | We propose a framework for studying financial and macroeconomic dynamics in an environment where liquid assets have a productive use but their supply is limited (i.e., the economy is starved for liquidity). The private demand for financial assets arises from the need to hold them for production. The private supply of financial assets is limited and unstable because of borrowing constraints and default risk. We discuss open-economy applications that analyze the accumulation of foreign reserves by emerging economies, the increase in public debt issued by advanced economies, the rapid growth of emerging economies, structural changes in financial markets, and financial globalization. A key result is that most of these developments led to a decline in interest rates and an increase in global macroeconomic volatility, driven by riskier borrower portfolios. |
| JEL: | F40 F41 G15 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34688 |
| By: | Francesco Zezza; Francesco Zezza |
| Abstract: | This article introduces OPENSIMPLEST, a highly parsimonious stock-flow consistent (SFC) model of an open economy. The model is designed as a pedagogical and analytical benchmark that preserves the core mechanisms of more complex open-economy SFC frameworks while remaining complete, transparent, and empirically tractable. Unlike standard two-country models, which are often incomplete representations of the rest of the world, difficult to interpret as analytical "toy models, " and hard to validate empirically due to the lack of bilateral financial data, OPENSIMPLEST adopts a one-country structure with an explicitly modelled, aggregate rest of the world. Despite its simplicity, the model retains the defining features of the SFC approach: coherent accounting across stocks and flows, endogenous money, portfolio allocation based on relative rates of return, current-account dynamics, and valuation effects arising from exchange-rate movements. The key modelling difference concerns the exchange-rate closure. Rather than being determined by contemporaneous asset-market equilibrium or balance-of-payments clearing, the exchange rate adjusts gradually in response to lagged current-account imbalances, shifting the focus from short-run financial arbitrage to the interaction between flow imbalances, stock positions, and valuation effects. Simulation exercises show that, for a wide range of fiscal, monetary, and external-demand shocks, the model reproduces the same qualitative dynamics obtained in more articulated open-economy SFC models. Differences arise only in the very short run following purely financial shocks, where the exchange-rate closure affects the impact response but not the medium-run adjustment path. The results suggest that many key insights of open-economy SFC analysis can be obtained within a small, complete, and empirically implementable framework, making OPENSIMPLEST a useful tool for teaching, sensitivity analysis, and comparative empirical applications. |
| Keywords: | Open Economy; Portfolio choice; Balance of Payments; Exchange Rate; StockFlow Consistent model |
| JEL: | E12 E44 E51 F32 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:lev:wrkpap:wp_1105 |
| By: | Konstantin Styrin (Bank of Russia, Russian Federation) |
| Abstract: | This paper studies how the effect of macroeconomic shocks on inflation depends on the severity of restrictions on international borrowing and imports. Using a calibrated model of a small open economy, I show that the effect of a change in the terms of trade, while being neutral in the absence of these restrictions, becomes inflationary in their presence. Inflation pressures emerge due to a higher interest rate on external borrowing, which is raised in order to pay for imports, and also due to trade costs, which have a direct effect on the domestic price of imported goods. As a consequence, monetary policy in the presence of restrictions on financial and trade transactions becomes tighter |
| Keywords: | monetary policy transmission; financial restrictions; trade restrictions |
| JEL: | E52 E58 G01 G28 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:bkr:wpaper:wps141 |
| By: | Mr. Bas B. Bakker |
| Abstract: | Under dominant-currency pricing—where many export prices are set in dollars—the real exchange rate allocates export windfalls between producers and consumers. When the real exchange rate is stable, rising dollar export revenues pass through nearly one-for-one into higher real local-currency export income, profits, and retained earnings; when it appreciates, part of the windfall accrues to consumers through cheaper imports, compressing exporters' margins. National saving should therefore respond to real local-currency export income—the portion accruing to domestic producers—rather than to dollar receipts per se. Using five-year panels for 42 economies over 1982–2022, we find that the national saving rate rises by about 0.27 percentage points for each 1 percentage point of GDP increase in real local-currency export income, while dollar export income has no independent effect once the local-currency measure is included. Peru versus Brazil during the commodity boom, China's post-WTO export surge, and Argentina's 2002 devaluation validate the mechanism and its timing. A coefficient estimated from 41 countries predicts China's 9.7-percentage-point saving increase (2002–2007) with an error of just 0.1 point. These findings reinterpret the "global saving glut" as the aggregate outcome of export booms whose windfalls accrued disproportionately to high-saving producers when real exchange rates remained stable. |
| Keywords: | Dominant-currency pricing; real exchange rates; export profitability; national saving; global saving glut; export booms; structural transformation |
| Date: | 2026–01–16 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/009 |
| By: | Alexandra Glazova (Bank of Russia, Russian Federation); Maxim Nevalennyi (Bank of Russia, Russian Federation); Andrey Sinyakov (Bank of Russia, Russian Federation) |
| Abstract: | This article presents a diagrammatic model of a small open economy. The dynamics of this graphical model are illustrated using impulse responses from the corresponding formal semi- structural model (Quarterly Projection Model, QPM). This graphical model reflects the modern understanding of how a fiat monetary economy and the current global financial system operate.1 It describes the specifics of monetary policy (MP) responses to supply and demand shocks under inflation targeting and the importance of anchoring inflation expectations. It explicitly considers the foreign exchange market (taking into account its potential imperfections) and demonstrates the role of the exchange rate in the transmission of MP. The model helps to link the global financial (credit) cycle to accumulating risks to financial stability, which create constraints on MP (‘dilemma, not trilemma’) and require the use of additional policy instruments. In our view, the presented diagrammatic model is a simpler version of the graphical model for analysing monetary policy in a small open economy than that proposed by Basu and Gopinath (2024). Therefore, it is suitable for less experienced readers—undergraduate students. The model not only accounts for the constraints facing monetary policy in a small open developing economy with developed financial markets but also allows for the analysis of extreme cases, like the closure of the financial account of the balance of payments and the associated changes in monetary policy transmission. Consequently, the model can be used to explain the rationale behind the Bank of Russia’s monetary policy decisions over the entire inflation targeting period. The authors provide a detailed analysis of the Bank of Russia’s decisions from 2022 onward using the model. |
| Keywords: | monetary policy, small open economy, foreign exchange market, inflation targeting, monetary policy dilemma, diagrammatic general equilibrium model, Quarterly Projection Model (QPM), Bank of Russia |
| JEL: | E58 F38 F41 G28 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:bkr:wpaper:wps154 |
| By: | Jesus Bejarano (Banco de la Republica, Bogota, Carrera 7 No. 14-78 Bogota, Colombia, Colombia); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa) |
| Abstract: | We analyze the impacts of climate change and carbon taxation on South Africa using a calibrated small open economy New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model featuring sticky-and-flexible-price specifications. A permanent productivity shock reducing GDP by 5 percent by 2050 lowers the natural interest rate by 7.5 basis points, appreciates the real exchange rate by 4 percent, and generates 4 basis points of inflation, requiring 0.5 basis point policy rate increases above the natural rate. A tenfold carbon tax increase (R236 to R2, 360/ton CO2) produces modest long-run output losses (0.22 percent) with 0.2 percent immediate inflation, necessitating 6 basis point policy tightening. Compressed adjustment horizons (2033 versus 2050) amplify short-run effects fivefold, with the natural interest rate declining by 40 basis points under accelerated climate impacts. Results suggest the South African Reserve Bank (SARB) must incorporate climate-adjusted potential output and natural rate estimates into its monetary policy framework, with particular attention to the timing of climate-induced productivity decline materialization which fundamentally determines the magnitude of required policy responses. |
| Keywords: | Climate change, Small open economy, New Keynesian DSGE, Monetary policy, South Africa |
| JEL: | E31 E32 E52 Q54 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:pre:wpaper:202601 |
| By: | Tara Iyer; Agustin Roitman; Mr. James P Walsh |
| Abstract: | Inflation in Türkiye has been high since 2021. This paper investigates the sources of this inflation and the impact of mitigating exchange rate volatility. Two main findings emerge. First, there has been a significant divergence in inflation dynamics across CPI components since late 2021—in particular, services inflation has exhibited more inertia than goods inflation, a result that stands out in both historical and cross-country contexts. The persistence in services inflation has been generally broad-based, with rental services playing an important role. Second, exchange rate shocks are estimated to have a smaller impact on services inflation than on goods inflation. The peak services inflation response to a nominal exchange rate shock is estimated to be fairly muted, at just one-tenth the size of the shock. Indeed, since mid-2023, there has been an unusually sharp rise in the relative price of services, as goods inflation has been more sensitive to exchange rate movements. These findings suggest that when inflation persistence—especially in services—is relatively high, inflation stabilization may require complementary policies to break inertia beyond a stable currency. |
| Keywords: | Türkiye; Services Inflation; Inflation Inertia; VAR; Exchange Rate Pass-Through |
| Date: | 2026–01–16 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/006 |
| By: | Nwaobi, Godwin |
| Abstract: | After decade of aspiring to fulfill sustainability ambitions, we are still facing a polycrisis of complex and intertwined global economic, social and environmental challenges. Specifically, climate – related challenges (stemming from both acute and chronic risks) are responsible for a series of macroeconomic shocks which (by inducing economic disruptions and fiscal pressures) directly affect a country’s fiscal space and debt sustainability. Consequently, Global Vulnerable Countries (GVCs) will have to face higher borrowing needs and costs which can result in heightened refinancing risks and fiscal space reduction. Regrettably, this will result in fewer resources being available to fund adaptation and mitigation policies to reduce potential climate vulnerabilities. In fact, this also increases the probability of default of the GVCs and can feed into the climate Crisis – Sovereign Debt Doom Cycle. Therefore, this paper argued that Debt for – Climate – Swaps (DFCS) could unlock direct funding for climate – related spending to break the negative cycle. Fundamentally, DFCS can free up fiscal space beyond the direct savings generated by the debt swap by enhancing governments’ repayment capacity is well as lowering borrowing costs often linked to debt distress situation. However, policy action at both global and national levels is needed to foster a more favorable external environment as well as enhancing macroeconomic stability with reduced structural constraints to accelerate long term growth and development of those vulnerable countries. In other words, for these actions, global coordination and cooperation will be critical and useful. |
| Keywords: | Debt, Sustainability, Climate Change, Climate finance, Vulnerability, Green Swaps, Debt Swaps, Poverty, Polycrisis, environment, development. |
| JEL: | F30 F31 F32 F33 F34 F35 G0 G15 Q0 Q5 Q50 Q54 Q56 |
| Date: | 2025–11–19 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:126894 |
| By: | Harry Aytug |
| Abstract: | Does euro adoption affect long-run economic growth? Existing evidence is mixed, reflecting limited treated countries, long horizons that challenge inference, and heterogeneity across member states. We estimate causal dynamic and heterogeneous treatment effects using Causal Forests with Fixed Effects (CFFE), a machine-learning approach that combines causal forests with two-way fixed effects. Under a conditional parallel-trends assumption, we find that euro adoption reduced annual GDP growth by 0.3-0.4 percentage points on average. Effects emerge shortly after adoption and stabilize after roughly a decade. Average effects mask substantial heterogeneity. Countries with lower initial GDP per capita experience larger and more persistent growth shortfalls than core economies. Weaker consumption and productivity growth contribute to the overall effect, while improvements in net exports partially offset these declines. A two-country New Keynesian DSGE model with hysteresis generates qualitatively similar patterns: one-size-fits-all monetary policy and scarring mechanisms produce larger output losses under monetary union than under flexible exchange rates. By jointly estimating dynamic and heterogeneous treatment effects, the analysis highlights the importance of country characteristics in assessing the long-run consequences of monetary union. |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2601.20169 |
| By: | Gianmaria Brunazzi; Cristina Re |
| Abstract: | This paper argues that the current proliferation of commercial tensions, monetary conflicts and military confrontations is not an irrational departure from economic logic, but the manifestation of a structural transformation of the world economy. We develop a model of debt imperialism in which the centre sustains its dominance by issuing internationally demanded liabilities that enable persistent external deficits and reinforce dependence on the dollar and on the centre’s market, while simultaneously favouring the industrial expansion of semi-peripheral economies. As these economies grow, they become potential challengers whose trajectories must be actively managed and periodically disciplined in order to preserve the hierarchy of the system. The paper confronts this framework with a wide set of international data (World Bank, IMF, UNCTAD, US Treasury and BEA). We analyse global balance-of-payments indicators from 1975 to 2023 and then examine the evolution of the United States’ trade creditors and the geography and composition of foreign holdings of its external liabilities. The results identify two distinct phases: a pre-2008 hegemonic phase characterised by relatively smooth surplus recycling into the centre, and a post-2008 phase marked by growing volatility, the fragmentation of the integrated world market, the reconfiguration of trade and financial circuits, and the decline of the previous globalisation regime. This analysis shows that the fragmentation of the global economy after 2008 has not resulted from a collapse of U.S. centrality, but from a defensive reorganisation of trade, financial and geopolitical relations aimed at disciplining both allies and semi-peripheral challengers |
| Keywords: | Debt imperialism; US Dollar Hegemony; Semi-periphery; Financial Crisis; Trade War. Jel Classification: F51; F54; N10 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:usi:wpaper:938 |