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on Open Economy Macroeconomics |
| By: | Stéphane Auray; Michael B. Devereux; Aurélien Eyquem |
| Abstract: | Can protectionism revive domestic production, slow automation, and help routine workers? We address this question in a dynamic open-economy model with heterogeneous firms, endogenous entry, and task-based production in which routine tasks can be performed by workers or robots. Import tariffs reallocate demand toward domestic goods, reshape markups and entry incentives, and generate fiscal revenues rebated to households. As a result, tariffs raise GDP and consumption measured at market prices and temporarily slow automation, even though intermediate output at factor prices and trade volumes decline. The gains are unevenly distributed: routine workers benefit robustly through transfers and reduced training, non-routine workers face opposing wage and rebate effects, and firm owners gain in aggregate as higher domestic demand and entry expand total profits despite lower per-firm values. Aggregate welfare gains hinge critically on key assumptions (automation, training, endogenous entry) and on how tariff revenues are rebated. In the baseline with uniform transfers, the welfare-maximizing tariff lies below the classical monopoly formula, while alternative rebate schemes can shift it substantially. Overall, the results caution against viewing tariffs as a simple tool for reindustrialization and highlight the role of technology adoption and fiscal incidence in evaluating protectionist policies. |
| JEL: | F30 F40 F41 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34935 |
| By: | Assaf Razin |
| Abstract: | This paper interprets Brexit as a two-stage institutional rupture that reshaped migration through expectations, exposure, and stress channels. Using a UK–Germany Difference-in-Differences framework, I show that the 2016 referendum generated a sharp decline in UK net migration relative to Germany, driven primarily by a contraction in immigration rather than simple outward flight. The 2021 termination of EU free movement reinforced this adjustment on the gross inflow margin, completing the structural reallocation of mobility flows. Migration responses were not uniform: countries more deeply integrated into EU mobility networks prior to 2016 experienced significantly stronger contractions, confirming that Brexit propagated along pre-existing exposure channels. Embedding macro-financial stress interactions reveals that institutional fragility amplified the referendum shock, particularly during the expectations phase. Stress intensified migration contractions in exposed settings in 2016, while post-2021 responses became more heterogeneous, especially on the emigration margin. Together, the results support a sequential interpretation: an anticipatory expectations shock in 2016 followed by regime completion in 2021. Beyond short-run behavioral adjustments, the findings are consistent with the fiscal self-selection framework. Increases in perceived institutional risk alter the relative returns to skill and investment, reshaping both the composition of migration and foreign direct investment. Because skilled labor and FDI are complementary, institutional credibility shocks can generate self-reinforcing declines in human capital inflows and investment. Brexit therefore emerges not merely as a trade or regulatory event, but as an institutional credibility shock in which migration operates both as an outcome and as a transmission mechanism linking regime change to long-run growth dynamics. |
| JEL: | F0 F29 F47 P0 P5 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34941 |
| By: | Akira Sasahara (Keio University) |
| Abstract: | This article provides an overview of the literature examining the effects of international trade on countries’ average income levels. It reviews the seminal study by Frankel and Romer (1999), which uses geography as an instrumental variable to identify the causal effects of trade on income in a cross-country setting. It also discusses studies by Felbermayr and Gröschl (2013), Feyrer (2019), and Feyrer (2021), which exploit time-varying geographic shocks–natural disasters, air transport, and a canal closure, respectively–to identify the causal effects of trade on income in panel data. Along the way, this article discusses key empirical challenges and the methodological advances developed to address them. It concludes that the widely accepted answer to the question “Does trade raise income levels?†is “Yes, †at least for the period from the 1950s to the 2000s. |
| Keywords: | International trade, income levels, empirical analysis |
| JEL: | F14 F43 O47 |
| Date: | 2025–02–20 |
| URL: | https://d.repec.org/n?u=RePEc:keo:dpaper:dp2026-003 |
| By: | Bahmani-Oskooee, Mohsen; Halicioglu, Ferda; UZ-AKDOGAN, Idil |
| Abstract: | There is a new strand of the literature in which researchers try to test the J-curve phenomenon using trade data in services. This literature is in its infancy, and any new addition must be welcomed. We add to this literature by testing the phenomenon using quarterly data over the 2005Q1-2022Q4 period from eight Turkish service industries. The symmetric and asymmetric impacts of exchange rate changes on each service trade balance are estimated empirically by employing linear and nonlinear autoregressive distributed lag approaches to cointegration methods. Considering the two approaches to be complementary, we find support for the J-curve effect in four service industries, i.e., in insurance and pensions, transport, travel industries, and intellectual property. Thus, lira depreciation will improve the trade balance of these four industries in the long run, while short-run effects oscillate. |
| Keywords: | Asymmetric J-curve, service trade, real effective exchange rates, Turkey |
| JEL: | C22 F14 F31 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128292 |
| By: | Changaya, Frederick; Comstock, Andrew; De Weerdt, Joachim; Duchoslav, Jan; Jamali, Andrew; Kamanga, Frank; Kumchulesi, Grace; Pauw, Karl |
| Abstract: | The current exchange rate regime in Malawi is untenable. It results in multiple effective parallel rates, which impose significant costs on the economy and the daily lives of citizens. A key concern underpinning the existence of the regime is that its removal would trigger rampant inflation and worsen livelihoods. However, the widespread importation of both food and nonfood products at informal exchange rates means that the average citizen derives little real benefit from the maintenance of the official rate. After two major fuel price hikes in recent months, pump prices have nearly converged with the cost that would prevail at market-determined exchange rates. Drawing on a combination of price multiplier and food demand simulations, this policy note shows that an exchange rate regime rationalization – through devaluing the official exchange rate to eliminate the informal premium and allowing the Malawi kwacha to trade at market-clearing levels – would not lead to runaway inflation or harm household welfare. Recent fuel price increases – in October 2025 and January this year – have pre-emptively absorbed much of the inflationary impact that would have been associated with exchange rate reform. Our analysis documents the direct, short-run effects of exchange rate unification on domestic prices and finds them to be relatively modest. Longer-term economic growth and sustained price stability will hinge on the effective execution of a coherent set of complementary reforms. Exchange rate unification is a necessary component of this package, but it is not sufficient. Implemented in isolation or treated as a one-off devaluation followed by business as usual, it will bring little relief. It must be accompanied by sound fiscal and monetary policy and sustained export growth to restore macroeconomic stability. We do not discuss the trade-offs inherent to these accompanying measures, as they have been addressed at length in AfDB et al. (2025) and Engel et al. (2025). Critically, there must be a credible and durable switch toward a more flexible and transparent exchange rate regime. It will take time for exports and growth to pick up after a devaluation, and whether they do will depend on economic actors believing that macroeconomic conditions will remain stable over the lifetime of their investments. It will require careful preparation to get the cocktail right. Politically, the current administration might just have one shot at this: failure will make future reform attempts much harder. |
| Keywords: | exchange rate; prices; controlled prices; price policies; Malawi; Africa; Sub-Saharan Africa; Eastern Africa |
| Date: | 2026–02–25 |
| URL: | https://d.repec.org/n?u=RePEc:fpr:impass:181860 |
| By: | Yu An; Amy W. Huber |
| Abstract: | We study geoeconomic competition and capital reallocation in global financial markets, using the foreign exchange (FX) funding market as our empirical setting. FX funding, obtained by borrowing one currency while pledging another through FX swaps, is instrumental to cross-border investment and provides high-frequency measures of capital reallocation. Countries compete for FX funding through policy actions that shift investment returns or funding costs, thereby inducing global portfolio rebalancing by private investors. We quantify this competition by measuring how one country’s inflow responds to another country’s actions, which we call “reallocation exposure.” Because observed funding flows reflect common shocks and strategic interactions across countries, bilateral influence is difficult to identify. We resolve this challenge by identifying “funding fronts, ” the independent margins of portfolio adjustment that enable systematic estimation of reallocation exposure. Applying our framework to a proprietary dataset, we find that FX funding competition is concentrated in a small number of funding fronts, with a dominant U.S. dollar front accounting for most capital reallocation. Consequently, changes in U.S. conditions generate disproportionately large reallocations elsewhere. We use reallocation exposure to construct time-varying measures of geoeconomic power and show that variations systematically track major monetary, fiscal, and geopolitical events. Finally, we characterize the network of financial competition and cooperation and show that strategic responses implied by reallocation exposure align with cross-country movements in policy rates. |
| JEL: | F31 G12 G15 G28 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34908 |
| By: | Rapetti, Martin |
| Abstract: | The article presents a simple three-sector macroeconomic model that incorporates key structural features common to many Latin American economies. The model allows for the formal identification of three benchmark levels of the real exchange rate (RER). The macroeconomic equilibrium RER is the level consistent with the simultaneous achievement of internal and external balance (i.e., full employment and a sustainable balance of payments). The social equilibrium RER corresponds to a state in which workers, at full employment, obtain a real wage consistent with their income aspirations. The developmental RER is defined as a benchmark level that ensures the labor-absorbing tradable sector earns a risk-adjusted rate of profit comparable to that in developed countries, thereby fostering investment. The three-RER-levels framework provides a unified analytical setting to organize and compare alternative theories developed in Latin America —including unbalanced productive structures, distributive conflict, structural inflation, macroeconomic populism, and stop-and-go cycles— and to clarify how different configurations of the benchmark RER levels underpin competing diagnoses and development strategies in the region. |
| Keywords: | real exchange rate, Latin America, equilibrium, conflict, development. |
| JEL: | E12 F41 N16 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:127649 |
| By: | Pablo Aguilar (BANCO DE ESPAÑA AND ECB); Rubén Domínguez-Díaz (BANCO DE ESPAÑA); José-Elías Gallegos (BANCO DE ESPAÑA); Javier Quintana (BANCO DE ESPAÑA) |
| Abstract: | We analyze how production networks transmit foreign price shocks and reshape monetary policy trade-offs in an open-economy New Keynesian model with domestic and international input–output linkages. Analytically, we show that closing the output gap does not generally stabilize domestic inflation, as sector-level terms-of-trade movements and trade imbalances become additional drivers of inflation dynamics. Quantitatively, we study an international energy price shock in a model calibrated to major euro area countries and their trade partners. We find that production networks significantly amplify the cumulative headline inflation response and substantially worsen monetary policy trade-offs, as measured by the sacrifice ratio. |
| Keywords: | open economy, production networks, New Keynesian, monetary policy |
| JEL: | E31 E32 E52 E70 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2607 |
| By: | Bahaj, Saleem; Reis, Ricardo |
| Abstract: | While the USD dominates cross-border transactions today, a few other currencies are also used internationally. This paper shows that central bank policies that reduce the volatility of borrowing costs for foreign firms in domestic currency can trigger a jumpstart of the currency’s international status, because firms’ choices of the currency of their working capital complement their sales invoicing. Empirically, the creation of swap lines by the People’s Bank of China between 2009 and 2018 supports this theoretical claim. Signing a swap line with a country is associated with an increase in the probability that the country would use the RMB at all by 12%, and a four-fold increase in the value of the country’s RMB payments. |
| Keywords: | lender of last resort; internationalization; dollar dominance |
| JEL: | E44 E58 F33 F41 G15 |
| Date: | 2026–02–27 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:128001 |
| By: | Ali, Amjad; Anjum, Rana Muhammad Adil; Irfan, Muhammad |
| Abstract: | This study investigates the impact of different exchange rate regimes on financial stability across both developed and developing countries from 2005 and 2023. Exchange rate policy is a critical component of a nation's macroeconomic framework, influencing key financial indicators and institutional dynamics. Employing a mixed-methods approach, data sources are the International Monetary Fund, World Bank, and Bank for International Settlements. The regression analysis reveals that developed economies tend to perform better under floating exchange rate regimes, owing to stronger institutional frameworks and greater policy flexibility. Furthermore, the study highlights the significant influence of regime type on financial indicators such as inflation, foreign reserves, and current account balances. It underscores the importance of institutional strength, credible monetary policy, and effective governance in the successful implementation of exchange rate regimes. These findings offer valuable insights for policymakers in tailoring exchange rate strategies to national economic contexts. The study recommends that countries align their regime choices with local economic conditions, reinforced by disciplined macroeconomic management and enhanced transparency. |
| Keywords: | Exchange Rate Regimes, Financial Stability, Monetary Policy, Inflation Volatility |
| JEL: | E4 E5 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:127533 |
| By: | Castillo Martinez, Laura; Reis, Ricardo |
| Abstract: | Central banks have a primary goal of price stability. They pursue it using tools that include the interest they pay on reserves, the size and the composition of their balance sheet, and the dividends they distribute to the fiscal authority. We describe the economic theories that justify the central bank's ability to control inflation and discuss their relative effectiveness in light of the historical record. We present alternative approaches as consistent with each other, as opposed to conflicting ideological camps. While interest-rate setting may often be superior, having both a monetarist pillar and fiscal support is essential, and at times pegging the exchange rate or monetizing the debt is inevitable. |
| Keywords: | monetary policy; policy rules; determinacy; effectiveness |
| JEL: | E31 E43 E52 E58 E62 F31 G21 |
| Date: | 2026–03–05 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:128408 |
| By: | Meghana Ayyagari; Vojislav Maksimovic; Rodimiro Rodrigo; Ariel Weinberger |
| Abstract: | The yen depreciation from 2012–2015 reduced robot prices for U.S. firms. Paradoxically, financially constrained firms dramatically increased adoption relative to their unconstrained peers. We rationalize this with a collateral model: robots are pledgeable assets requiring non-pledgeable intangibles, raising the effective cash invoice for constrained firms and amplifying their elasticities. Linking robot and automation machinery imports to Compustat, we find constrained firms are twice as responsive to exchange rate and interest rate shocks, with capital prices dominating (45-60% larger) borrowing costs. Results reveal a collateral channel reallocating technology adoption toward constrained incumbents, with implications for technology diffusion and competitive dynamics. |
| Keywords: | automation, robots, financial constraints, investment, prices of capital goods, technology adoption, monetary policy, foreign exchange |
| JEL: | E22 E52 F31 L10 O14 D22 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12526 |
| By: | Juan Camilo Laborde Vera (Universidad de los Andes) |
| 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 using alternative measures of high-frequency monetary shocks. |
| Keywords: | Monetary Policy, Local Projections, Monetary Policy Shocks, Current Account Adjustment, International Macroeconomics |
| JEL: | E52 F32 F41 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:col:000089:022354 |
| By: | Ka Lok Wong (Steve) (UN Economic Commission for Africa); Mark Manger (University of Toronto); Ugo Panizza (Geneva Graduate Institute and CEPR) |
| Abstract: | Emerging market economies (EMEs) regularly tap domestic and international capital markets through scheduled sovereign bond auctions. In this paper, we leverage a novel dataset covering over 75, 000 sovereign issuance events and 20, 000 securities from 20 EMEs between the early 2000s and 2023 to analyze the determinants of bond issuance choices, focusing on volume, maturity, and currency denomination. We find that local currency debt issuance is largely associated with refinancing needs, while foreign currency issuance reflects more strategic and cyclical considerations. In particular, foreign currency issuance correlates with global macroeconomic conditions, interest rate differentials, and investor sentiment. Our findings suggest that EME governments differentiate their debt management strategies based on the currency of issuance, with local currency issuance shaped by domestic budget mechanics and foreign currency issuance by external constraints and opportunities. |
| Keywords: | Sovereign Borrowing; Public Debt Management; Emerging Markets |
| JEL: | F34 H63 E44 |
| Date: | 2026–03–05 |
| URL: | https://d.repec.org/n?u=RePEc:gii:giihei:heidwp06-2026 |
| By: | Shuvam Das; Davide Furceri; Nikhil Patel; Mr. Adrian Peralta-Alva |
| Abstract: | We build the first global quarterly narrative database of discretionary government spending actions by applying a fixed GPT–4.1 prompt to Economist Intelligence Unit (EIU) Country Reports. The resulting series identifies exogenous spending shocks—expansions and contractions—for an unbalanced panel of 64 countries from 1952:Q1 to 2023:Q4. We validate the database by (i) replicating expert narrative coding in Romer and Romer (2019), (ii) showing that the identified shocks predict subsequent movements in measured government spending, and (iii) establishing alignment with action-based consolidation measures in Adler et al. (2024). Using country-by-country proxy SVARs that treat the narrative indicator as an internal instrument, we estimate cumulative government spending multipliers. The median multiplier is about 0.7 at horizons up to two years, with substantial heterogeneity across countries and states. Multipliers are larger in countries that are less open to trade, under fixed exchange rate regimes, during downturns, and at the zero lower bound. Political conditions also matter: multipliers are smaller when broad economic policy uncertainty and fiscal policy-specific uncertainty is high, but weak political support is associated with larger conditional multipliers. |
| Keywords: | fiscal multipliers; government spending shocks; narrative identification; large language models; text-as-data; proxy SVAR; cross-country database. |
| Date: | 2026–03–06 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/043 |
| By: | Todorova, Tamara |
| Abstract: | We discuss the terms-of-trade effects of the import tariffs imposed by the US administration. Import tariffs benefit a large nation by suppressing the export price of the good it imports and by improving its terms of trade. This allows the large nation to move to a higher consumption point without the need for actual economic growth. The terms-of-trade gain is substantive for a large nation, while there is none for a small open economy. Borrowing on international trade theory we argue that the purpose of the import tariffs imposed by the USA is not merely to resolve trade balance issues, but rather to effortlessly improve the consumption position of the country. |
| Keywords: | gains from trade; terms of trade; consumption position; community indifference curves; protectionism. |
| JEL: | F11 F13 F43 O41 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:127575 |
| By: | Monica Tran-Xuan |
| Abstract: | This paper develops a theory of sovereign debt sustainability driven by the government’s motive for redistribution. It studies a heterogeneous-agent small open economy in which redistribution relies on distortionary labor taxation and the government lacks commitment in its fiscal policies. Access to international credit markets lowers the cost of redistribution, while default into financial autarky raises it, generating an endogenous cost of default. Quantitatively, the model accounts for the buildup of Italy’s external debt and the positive cross-country correlation between pre-tax income inequality and external debt. Optimal austerity is more gradual when distributional concerns are present. |
| Keywords: | Inequality; Limited commitment; Optimal taxation; Redistribution; Sovereign debt |
| Date: | 2026–03–06 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/042 |