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on Open Economy Macroeconomics |
| By: | Bryan Hardy; Felipe Saffie; Ina Simonovska |
| Abstract: | We study how U.S. dollar fluctuations transmit through domestic supply chains in emerging markets. Large firms borrow in foreign currency and extend trade credit to domestic partners, exposing the supply chain to exchange rate risk. We develop a model where financially constrained suppliers pass through shocks to buyers, while unconstrained firms absorb them. Using quarterly firm-level data from 19 emerging markets, we provide empirical evidence consistent with the model's predictions. We find that even highly exposed firms reduce trade credit only modestly following a depreciation, while accepting large profit losses, suggesting that firm-to-firm credit relationships partially shield downstream firms from financial shocks. |
| Keywords: | trade credit, financial constraints, supply chains, financial linkages, dollar |
| JEL: | F31 F34 G21 G32 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12598 |
| By: | Mario Larch; Leandro Navarro; Dennis Novy |
| Abstract: | International trade flows show strong persistence over time. Standard static gravity models cannot rationalize this persistence and lack a micro-foundation for including lagged trade flows as a determinant of current trade. We develop a structural dynamic gravity framework in which persistence arises from firms' sluggish adjustment of destination-specific prices, analogous to sticky prices in macroeconomics but operating at the bilateral level. The model delivers a gravity equation with lagged trade flows as a structural feature rather than an ad hoc add-on. We propose a novel estimation approach for dynamic gravity models that explicitly accounts for persistence. Empirically, we show that ignoring persistence can lead standard gravity estimates to substantially understate the effects of trade policy changes. As an application, we find that the estimated trade impact of regional trade agreements can increase by 30 percent or more once persistence is taken into account. |
| Keywords: | dynamic gravity, persistence, sluggish price adjustment, sticky prices, RTA, trade costs |
| JEL: | E31 F13 F14 F41 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12599 |
| By: | Benjamin Born (University of Bonn, CEPR, CESifo, & ifo Institute); Gernot J. Müller (University of Tübingen, CEPR, & CESifo); Johannes Pfeifer (University of the Bundeswehr Munich); Susanne Wellmann (Unternehmer Baden-Württemberg) |
| Abstract: | Interest rate spreads vary widely across time and countries and are a central driver of business cycles in emerging market economies (EMEs). Since 2008, advanced market economies (AMEs) have exhibited persistently higher and more volatile spreads, alongside increased macroeconomic volatility and stronger co-movement with EMEs. We document six facts showing that AMEs have become more similar to EMEs along key dimensions. We interpret these patterns through a small open economy model and uncover a stark dichotomy: higher spreads reflect greater indebtedness and lower debt tolerance, whereas greater macroeconomic volatility and co-movement are driven by stronger global shocks. |
| Keywords: | Country spreads, debt, interest rate shocks, business cycle, financial frictions |
| JEL: | F41 G15 E32 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:ajk:ajkdps:403 |
| By: | Fagerberg, Jan |
| Abstract: | My research focuses on global economic change, its driving forces, and what individual countries can do to cope with the challenges and opportunities that arise. In this paper I discusses the influence of Schumpeter’s theorizing on my work. Three themes, central to my research, and for which Schumpeter’s works have provided inspiration and guidance, are considered. The first concerns the international competitiveness of a country, what it means, how it is shaped, and the implications for policy. A second theme has to do with the large differences in the levels of economic development across countries, and what poor countries can do to exploit the potential for catching up. The third theme concerns the ongoing global green shift. The chapter concludes with some thoughts on the relevance of a Schumpeterian perspective for the study of future economic development. |
| Keywords: | Global economic change, international competitiveness, economic development, green shift, Schumpeterian perspectives |
| JEL: | F41 O1 O3 |
| Date: | 2026–04–05 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128582 |
| By: | Bippus, B.; Lloyd, S.; Ostry, D. |
| Abstract: | Using data on the external positions of global banks in the world's largest banking hub, the UK, and a granular international-banking model, we show that large banks' idiosyncratic net flows into USD debt influence exchange-rate dynamics. UK-resident banks' USD demand is, on average, price-elastic, whereas their counterparties' USD supply is price-inelastic. We document a structural shift—from banks' being price-inelastic before the Global Financial Crisis to price-elastic afterwards—linked to a marked rise in banks' hedging on-balance-sheet USD net exposures via FX derivatives. This change may help explain the tighter link between exchange rates and macroeconomic fundamentals since the crisis. |
| Keywords: | Capital Flows, Exchange Rates, FX Derivatives, International Banking |
| JEL: | F31 F32 F41 G15 G21 |
| Date: | 2026–03–10 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camdae:2359 |
| By: | Sangyup Choi (Yonsei University); Chaewon Kim (Yonsei University); Inhwan So (Hongik University) |
| Abstract: | We examine the role of demographic change in long-run real exchange rate (RER) determination. Demographic shifts affect saving and investment behavior, labor supply, and the relative demand for tradable and non-tradable goods, and may therefore influence RERs beyond standard macroeconomic fundamentals. We estimate a panel cointegration model for 75 countries over 1970-2024 that augments a standard long-run RER specification with four demographic variables: the old-age dependency ratio, fertility, life expectancy, and net migration. Demographic variables remain informative even after controlling for productivity. We also complement the baseline specification with a full age-distribution approach, which provides an internally consistent representation of demographic change. Combining the estimated long-run relationships with projections from the United NationsWorld Population Prospects, we construct conditional RER projections through 2050. Economies projected to age more rapidly tend to face long-run real appreciation pressure. |
| Keywords: | Real exchange rate; Demographic changes; Panel cointegration; UNWorld Population Prospects; Out-of-sample projections |
| JEL: | D31 E21 F41 J11 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:yon:wpaper:2026rwp-285 |
| By: | Marina Azzimonti-Renzo; Nirvana Mitra |
| Abstract: | Emerging economies exhibit pro-cyclical fiscal policy, counter-cyclical sovereign spreads, and recurrent debt crises, whereas advanced economies sustain high debt with low spreads and lower volatility in outcomes. We document that these differences are systematically related to institutional strength, measured by horizontal accountability, and to the prevalence of clientelistic allocation of public resources in a panel of 51 countries (1994-2023). We develop a dynamic political-economy model of sovereign borrowing with long-term debt in which institutional constraints discipline clientelistic transfers and shape default incentives. Variation in institutional strength generates both emerging-market and developed-economy outcomes within a unified framework and accounts for heterogeneous post-democratization trajectories in emerging markets. |
| Keywords: | Sovereign Debt Crises; Tax Smoothing; Checks and Balances; Clientelism; Sovereign De fault; Fiscal Policy; Emerging Markets; Long-term Debt |
| JEL: | D72 E43 F34 E62 F41 |
| Date: | 2026–03–30 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedrwp:102967 |
| By: | Oscar Iván Ávila-Montealegre; Juan J. OspinaTejeiro; Anderson Grajales-Olarte; Mario A. Ramos-Veloza |
| Abstract: | We analyze how the minimum wage affects a typical emerging economy with high labor informality. Using an extended New Keynesian small open economy model, we find that an unexpected increase in the minimum wage disproportionately affects low-skilled workers, with limited effects on inflation and the monetary policy rate. A higher minimum wage raises production costs and induces the substitution of formal workers with informal labor and machinery, leading to lower output, employment, and net exports. We also find that the existence of a minimum wage alters the transmission of productivity, demand, and monetary shocks, resulting in a more persistent impact on macroeconomic variables and lower effectiveness of monetary policy in controlling inflation. While the minimum wage mitigates consumption inequality in the short run, it increases employment volatility. The macroeconomic implications of minimum wages are significant, and the mechanisms differ from those highlighted in the literature for advanced economies. |
| Keywords: | DSGE model, minimum wage, informal labor markets, monetary policy, heterogeneous agents |
| JEL: | E13 E50 J31 J46 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:rbp:wpaper:2025-018 |
| By: | Michael E. Waugh |
| Abstract: | This paper documents facts about international trade in AI-related products. I develop a large language model (LLM) classification tool that maps HS10 codes in U.S. trade data to products used in the construction and operation of AI infrastructure. AI-related products account for 23 percent of U.S. imports in 2025, and imports of these products have grown by 73 percent since 2023. Over the same period, imports of non-AI-related products have grown by only 3 percent, with the divergence between the two categories beginning in early 2024. Mexico is a key market on both the import and export side, and together with Taiwan these two countries account for about half of all U.S. trade in AI-related products. Trade policy has treated these products lightly with product-level exemptions shielding much of AI-related imports from tariffs. Absent the AI boom, a simple accounting exercise suggests that the U.S. goods trade deficit would have been nearly $200 billion smaller in 2025. |
| JEL: | F1 F40 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35053 |
| By: | Röder, Jana; Tillmann, Peter; Winker, Peter; Yun, Jinyeong |
| Abstract: | German government debt is considered a safe asset in times of turbulence. We estimate the impact of changes in the risk appetite of global investors on weekly investment fund flows into the German sovereign bond market. Our key contribution is to allow the impact of such shocks to depend on the extent of disagreement about the path of fiscal policy, which we measure from the texts of all speeches delivered in the German Bundestag. An increase in global risk causes strong inflows into German government bonds if the coalition government is united, but only small and short-lived inflows if disagreement within the government is high. In contrast, disagreement between the government and the opposition has no moderating effect on fund inflows. We also find that the dependence of safe-haven flows on the prevailing level of fiscal disagreement is higher for actively managed funds and for funds domiciled abroad. |
| Keywords: | capital flows, disagreement, policy uncertainty, safe asset, text analysis |
| JEL: | F41 G15 H30 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:imfswp:340020 |
| By: | Ernst, Anne; Hinterlang, Natascha; Jäger, Marius; Stähler, Nikolai |
| Abstract: | Since 2018, tariffs have re-emerged as a tool for protecting domestic economies, particularly in the US. This paper examines the macroeconomic and welfare effects of various import tariff scenarios using a four-region dynamic general equilibrium model with a multi-sectoral production network. The scenarios include unilateral US tariffs, coordinated US-EU tariffs, Chinese retaliation, Europe's non-participation, and sector-specific versus broad tariffs. Our results show that tariffs initially boost domestic value-added output by making local goods relatively cheaper. While consumption can increase permanently, the output benefits are short-lived. Increased production costs and reduced global income largely offset the output gains over time. Tariff-targeted countries have an incentive to retaliate, and when they do, these output/consumption gains do not materialize. As a result, welfare effects are negative. Regardless of direct involvement in tariff conflicts, the rest of the world suffers from reduced aggregate income. The effects of tariffs and strategic interac- tions depend on which sectors are subject to tariffs. Overall, tariffs appear to be an inefficient tool for economic protection due to the high probability of retaliation. |
| Keywords: | Tariffs, Trade Conflict, Protectionism, International Trade, DynamicGeneral Equilibrium Model, Production Network |
| JEL: | F12 F13 F40 D57 E27 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:340010 |
| By: | Chang Ma; Shang-Jin Wei |
| Abstract: | China's large current account surplus has been an irritant to its trading partners. While industrial and trade policies often lead to sector-level imbalances, they play a relatively limited role in the economy-wide surplus. Structural factors such as an unbalanced sex ratio and uneven access to financing by state-owned and non-state firms are more important determinants of the current account imbalance. While macroeconomic stimulus can boost imports and reduce the surplus in the short run, any long-term solution would need to involve reforms aiming at addressing the structural problems. |
| JEL: | F3 F4 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35056 |
| By: | Diwan, Ishac; Ferry, Marin |
| Abstract: | Do poor countries systematically over-borrow, leading to cyclical debt crises, or are the current debt difficulties caused by unusually large external shocks? To answer this question, the paper focuses on the debt situation in 2019, before a series of negative shocks started hitting developing countries. The authors dispute the cynical view that for poor countries, debt crisis is destiny. They show that in the recent period, there is a much greater heterogeneity of cases that suggested by this deterministic pessimism. The findings suggest that while some countries’ current debt difficulties mirror past patterns, others face challenges that are distinct and influenced by external shocks. |
| Keywords: | external debt, debt distress, HIPIC, terms of trade shock, investment and growth |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:cpm:notfdl:2505 |
| By: | Kaaresvirta, Juuso; Kerola, Eeva; Nuutilainen, Riikka |
| Abstract: | This paper examines recent developments in the internationalisation of the Chinese yuan, focusing on trade and portfolio flows, foreign exchange markets, cross-border payments, and official reserve holdings. The promotion of the yuan's global role has been a deliberate policy objective for Chinese authorities over the past two decades. The use of the yuan in China's own cross-border trade and portfolio flows has increased in recent years. Still, broader international adoption of the yuan remains very small compared to the US dollar and the euro and has not increased markedly in recent years. Under the current Chinese economic and financial framework-characterized by constrained capital account openness and an emphasis on market and exchange rate stability- the scope for a substantial increase in global yuan use remains limited. |
| Keywords: | China, yuan, currency, internationalisation |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofitb:340029 |