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on Open Economy Macroeconomics |
| By: | Joseph Abadi; Jesús Fernández-Villaverde; Daniel Sanches |
| Abstract: | We present a micro-founded monetary model of the world economy to study international currency competition. Our model features "unipolar'' equilibria, with a single dominant international currency, and "multipolar'' equilibria, in which multiple currencies circulate internationally. Long-run equilibria are highly history-dependent and tend towards the emergence of a dominant currency. Governments can compete to internationalize their currencies by offering attractive interest rates on their sovereign debt, but large economies have a natural advantage in ensuring the dominance of their currencies. We calibrate the model to assess the quantitative importance of these mechanisms and study the international monetary system's dynamics under several counterfactual scenarios. |
| JEL: | E42 E58 G21 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34817 |
| By: | Isgut, Alberto |
| Abstract: | The risks posed by issuing debt denominated in a foreign currency are well understood: if the domestic currency depreciates, the local currency cost of servicing such debt will increase. But what has been the recent experience of developing countries? This paper provides a quantitative assessment of the additional cost of servicing foreign currency denominate debt using both data on individual sovereign and subnational bonds and data from the World bank's International Debt Statistics database. The paper also explores whether such additional costs, which are due to depreciation of the exchange rate, have an adverse effect on fiscal space. |
| Keywords: | Sovereign debt, developing countries, foreign currency denominated debt, currency risk, fiscal space |
| JEL: | F34 H63 E62 G15 O23 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:iedlwp:336696 |
| By: | Andrea Ferrero; Ambrogio Cesa-Bianchi; Martin Wolf; Luca Fornaro |
| Abstract: | We provide a framework that connects industrial policies to global imbalances and technological hegemony, and describe some empirical facts consistent with our model. We study the international spillovers triggered by industrial policies promoting high-tech sectors. Since high- tech goods and services are typically traded internationally, these policies boost the supply of tradable goods. Moreover, industrial policies lead to trade surpluses if the government pursues an unbalanced policy mix, such that domestic demand does not rise as much as supply. These surpluses are absorbed by the rest of the world, which in response runs trade deficits. Absent policy interventions, trade deficits reduce the competitiveness of the domestic tradable sector, stifling innovation and productivity growth. Innovation policies can help the rest of the world to mitigate these negative spillovers. |
| Keywords: | Capital flows, China shock, endogenous growth, high-tech, innovation, international spillovers, productivity, tariffs, trade imbalances |
| JEL: | E21 E22 E23 E44 F32 F43 O31 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:bge:wpaper:1558 |
| By: | Ambrogio Cesa-Bianchi; Andrea Ferrero; Luca Fornaro; Martin Wolf |
| Abstract: | We provide a framework that connects industrial policies to global imbalances and technological hegemony, and describe some empirical facts consistent with our model. We study the international spillovers triggered by industrial policies promoting high-tech sectors. Since high-tech goods and services are typically traded internationally, these policies boost the supply of tradable goods. Moreover, industrial policies lead to trade surpluses if the government pursues an unbalanced policy mix, such that domestic demand does not rise as much as supply. These surpluses are absorbed by the rest of the world, which in response runs trade deficits. Absent policy interventions, trade deficits reduce the competitiveness of the domestic tradable sector, stifling innovation and productivity growth. Innovation policies can help the rest of the world to mitigate these negative spillovers. |
| Keywords: | trade imbalances, productivity, international spillovers, tariffs, innovation, high-tech, China shock, endogenous growth, capital flows |
| JEL: | E21 E22 E23 E44 F32 F43 O31 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:upf:upfgen:1939 |
| By: | Torsten Ehlers; Mathias Hoffmann; Alexander Raabe |
| Abstract: | House prices co-move considerably across countries. We show how non-US global banks and their exposure to US dollar funding conditions help explain this comovement. When the dollar appreciates, mortgage lending and house prices decrease more in borrower countries whose non-US creditor banks are more exposed to dollar funding conditions. As US dollar funding conditions vary, borrowing country pairs with higher joint exposure to US dollar funding conditions via their non-US creditor banks exhibit a higher synchronization of mortgage credit and house price growth. We capture the exposure to dollar funding conditions by the bilateral treasury basis between the currency of the non-US global creditor banks' nationality and the US dollar, a choice that we motivate in a simple value-at-risk model. Our results identify a novel international spillover channel of US dollar funding conditions. Because it works through heterogenous dollar funding exposures among creditors, this new channel is neither linked to common-lender exposures nor to currency mismatches on borrower countries' balance sheets, typically associated with the financial channel of the exchange-rate. |
| Keywords: | house prices, synchronization, US dollar funding, dollar cycle, US treasury basis, convenience yield, capital flows, global banks, global banking network |
| JEL: | F34 F36 G15 G21 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1332 |
| By: | Kristin Forbes; Jongrim Ha; M. Ayhan Kose |
| Abstract: | Business cycles are increasingly driven by global shocks, rather than the domestic demand shocks prominent in earlier decades, posing challenges for central banks seeking to meet domestic mandates and communicate their policy decisions. This paper analyzes the evolving influence and characteristics of global and domestic shocks in advanced economies from 1970-2024 using a new FAVAR model that decomposes movements in interest rates, inflation, and output growth into four global shocks (demand, supply, oil, and monetary policy) and three domestic shocks (demand, supply, and monetary policy). We find that the role of global shocks has increased sharply over time and that their characteristics differ from those of domestic shocks across multiple dimensions. Compared to domestic shocks, global shocks have a larger supply component, higher variance, more persistent effects on inflation, and are more asymmetric (contributing more to tightening than to easing phases of monetary policy). As global supply shocks have become more prominent, central banks have also been less willing to “look through” their effects on inflation than for comparable domestic shocks. The distinct characteristics and rising influence of global shocks—particularly global supply shocks—have significant implications for modeling monetary policy and designing central bank frameworks. |
| JEL: | E31 E32 E52 F41 F42 F44 F47 F62 G15 Q43 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34806 |
| By: | Joyce, Joseph |
| Abstract: | The current accounts of most emerging economies include primary income deficits, which in turn largely consist of investment income payments on foreign direct investment earnings. For these countries, the persistent deficits have become a structural component of the current account. In addition, for some countries secondary income, which includes personal transfers from workers who are abroad, is also crucial. These surpluses partly offset the deficits in trade and primary income. We examine the response of the trade balance, primary income and secondary income balances to macroeconomic factors in a sample of 24 emerging markets economics over the period of 1990 – 2022. We use seemingly unrelated regressions models with random effects to account for correlated errors across the three equations and compare these results with the results of an estimate of the current account. The responses of the three sub-balances to policy and control variables varies widely, which can complicate efforts to lower a current account deficit. We examine the response of the three sub-balances to financial crises, which increase the current and trade accounts. We also discuss the use of retained earnings to finance new FDI. |
| Keywords: | trade account, primary account, investment income, secondary income, remittances |
| JEL: | F21 F23 F24 F32 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:127327 |
| By: | Hamidreza Aziminia (Sharif University of Technology); Seyed Ali Madanizadeh (Sharif University of Technology); Amineh Mahmoudzadeh (Sharif University of Technology) |
| Abstract: | This paper provides new evidence on the impact of exchange rate depreciation on pricing behavior. Using micro data on consumer price quotes in Iran from 2006 to 2022, we study price adjustments across a wide range of macroeconomic conditions—from low to high inflation and from stable to volatile exchange rates. While most existing studies emphasize the role of inflation, our analysis highlights the distinct contribution of exchange rate depreciation. We find that (1) in the short run, both the frequency and absolute size of price changes respond more to inflation than to exchange rate depreciation, but FX effects is stronger over longer horizons; (2) FX depreciation has a pronounced nonlinear effect on frequency of price changes, showing a significant impact only at high depreciation levels, while inflation displays a more linear pattern; (3) we find no evidence of nonlinear effects for either inflation or FX depreciation on the absolute size of price changes; and (4) expected inflation influences pricing behavior independently of actual inflation. |
| Date: | 2025–12–05 |
| URL: | https://d.repec.org/n?u=RePEc:erg:wpaper:1809 |
| By: | Santiago Camara (McGill University) |
| Abstract: | This paper examines the sign-dependent international spillovers of Federal Reserve and European Central Bank monetary policy shocks. Using a consistent high-frequency identification of pure monetary policy shocks across 44 advanced and non-advanced economies and the methodology of Caravello and Martinez-Bruera, 2024, we documentstrong asymmetries in international transmission. Linear specifications mask these effects: contractionary shocks generate large and significant deteriorations in financialconditions, economic activity, and international trade abroad, while expansionary shocks yield little to no measurable improvement. Our results are robust across samples, identification strategies, and the framework proposed by Ben Zeev et al., 2023. |
| Keywords: | Federal Reserve; European Central Bank; monetary policy spillovers; international transmission; sign-dependent asymmetry |
| JEL: | E52 F41 F42 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:aoz:wpaper:386 |
| By: | Juan Camilo Laborde Vera |
| Abstract: | How does the current account respond to a monetary policy shock? The answer to this perennial question is theoretically ambiguous and empirical evidence is particularly scarce in emerging markets due to challenges in identifying exogenous policy variation. I construct a novel dataset of monetary policy shocks using analysts’ forecasts of policy rate decisions for an unbalanced panel of five emerging market economies in Latin America during 1999-2024. I estimate impulse response functions using local projections and find that a monetary tightening shock leads to a “J curve” pattern in the current account: a short-run contraction followed by a medium-run expansion. The response is heterogeneous in the cross-section and depends on the strength of the exchange rate appreciation resulting from the monetary contraction and the country’s export-import structure. The panel estimation results show that exports and imports exhibit a hump-shaped pattern and decline by 4.5 and 5.9 per cent, respectively, as a result of a one-percentage-point policy tightening shock. The results are robust to alternative measures of monetary shocks. *****RESUMEN: ¿Cómo responde la cuenta corriente a un choque de política monetaria? La respuesta a esta pregunta perenne es teóricamente ambigua y la evidencia empírica es particularmente escasa en países emergentes debido a desafíos en la identificación de fuentes de variación exógena de la política monetaria. En este artículo, construyo una base de datos novedosa de choques de política monetaria utilizando pronósticos de analistas sobre decisiones de tasa de política monetaria para un panel desbalanceado de cinco economías emergentes de América Latina durante 1999-2024. Estimo funciones de impulso-respuesta mediante proyecciones locales y encuentro que una contracción monetaria genera un patrón de "curva J" en la cuenta corriente: una caída en el corto plazo seguida de una expansión en el mediano plazo. La respuesta es heterogénea entre países y depende de la fortaleza de la apreciación cambiaria que resulta de la contracción monetaria y de la estructura exportadora e importadora del país. Los resultados de las estimaciones tipo panel muestran que las exportaciones y las importaciones exhiben un patrón jorobado y caen 4, 5% y 5, 9%, respectivamente, como resultado de un choque monetario contractivo de un punto porcentual. Los resultados son robustos a la utilización de medidas alternativas de choques monetarios. |
| Keywords: | Monetary Policy, Local Projections, Monetary Policy Shocks, Current Account Adjustment, Open Economy Macroeconomics, International Macroeconomics, Política Monetaria, Proyecciones Locales, Choques de Política Monetaria, Ajuste de la Cuenta Corriente, Macroeconomía de Economía Abierta, Macroeconomía Internacional. |
| JEL: | E52 F32 F41 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:bdr:borrec:1343 |