|
on Open Economy Macroeconomics |
| By: | Hyeongwoo Kim; Shuwei Zhang |
| Abstract: | This paper characterizes optimal monetary policy responses to technology shocks in a two-country model with sticky prices, local currency pricing, and international technology diffusion. We show that technology shocks originating in the tradable sector, regardless of their country of origin, elicit symmetric and closely coordinated monetary policy responses across countries, providing a rationale for a fixed exchange rate regime. By contrast, technology shocks originating in the nontradable sector generate asymmetric policy responses and depreciate the source country's currency, supporting the case for exchange rate flexibility. We further show that the international transmission of technology shocks amplifies real sector dynamics through news effects, prompting central banks to adopt contractionary policies, a result that stands in sharp contrast to the prior literature. |
| Keywords: | Exchange Rate Regimes; Interest Rate Rules; Local Currency Pricing; Sticky Price; Technology Diffusion |
| JEL: | F31 F41 O0 E52 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:abn:wpaper:auwp2026-05 |
| By: | Joseph Abadi; Jesús Fernández-Villaverde; Daniel R. Sanches |
| Abstract: | We present a micro-founded monetary model of the world economy to study international currency competition. Our model features both “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 dynamics of the international monetary system under counterfactual scenarios. |
| Keywords: | dominant currency; international monetary system; strategic complementarities; history dependence |
| JEL: | E42 E58 G21 |
| Date: | 2026–04–15 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedpwp:103040 |
| By: | Dudley Cooke; Tatiana Damjanovic |
| Abstract: | This paper studies macroprudential policy in a small open economy with financial intermediation and nominal rigidity. Fluctuations in bank deposit rates - which depend on the focus of monetary policy - create liability-side volatility, destabilize net interest margins, and reduce output. A macroprudential policy which shifts bank funding away from deposits towards equity enhances domestic risk-sharing and mitigates volatility. Optimal macroprudential policy generates bank capital ratios that differ by up to 5 percentage points depending on whether monetary policy stabilizes domestic prices or the exchange rate. Relative to an unregulated economy, macroprudential policy raises welfare by between 0.4 percent and 0.9 percent of steady-stateconsumption. |
| JEL: | E52 F41 G11 G15 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ptu:wpaper:w202601 |
| By: | Tamar den Besten; Regis Barnichon; Diego R. Känzig; Aayush Singh |
| Abstract: | We study the macroeconomic effects of tariff policy using U.S. historical data from 1840–2024. We construct a narrative series of plausibly exogenous tariff changes – based on major legislative actions, multilateral negotiations, and temporary surcharges – and use it as an instrument to identify a structural tariff shock. Tariff increases are contractionary: imports fall sharply, exports decline with a lag, and output and manufacturing activity drop persistently. The shock transmits through both supply and demand channels. Prices rise in the full sample but fall post-World War II, a pattern consistent with changes in the monetary policy response and with stronger international retaliation and reciprocity in the modern trade regime. |
| JEL: | E30 F13 F14 F41 H20 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35102 |
| By: | Julia Schmidt; Maéva Silvestrini; Urszula Szczerbowicz |
| Abstract: | This paper challenges the conventional wisdom that US monetary policy tightening attracts foreign capital through purchases of US Treasuries. Using bilateral data on US foreign assets and liabilities, we show that much of the observed capital inflows into the US is actually due to US investors repatriating funds from foreign equities. This highlights important heterogeneity between domestic and foreign investors. Extending the analysis to Central Bank Information shocks—monetary surprises conveying additional economic information—we document a distinct global portfolio rebalancing characterized by risk-on behavior, with US investors increasing foreign equity holdings and foreign investors shifting into US equities. |
| Keywords: | Monetary Policy, Spillovers, Capital Flows |
| JEL: | F44 E52 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:1040 |
| By: | Joshua Aizenman; Rodolphe Desbordes; Jamel Saadaoui |
| Abstract: | How damaging is a “trade war” compared to a “military war” or a “war of words”? Aggregate conflict indicators cannot say, because they treat missile strikes, sanctions, and diplomatic protests as equivalent. We build a monthly bilateral indicator from GDELT event data, calibrated against human-curated ground truth, that decomposes hostility into four layers: kinetic fighting (“military war”), military posture, sanctions-context tensions (“trade war”), and routine diplomacy. The decomposed panel reveals a secular shift: over the past decade, governments have steadily substituted economic coercion for military confrontation, nearly doubling the trade-weighted share of hostility channelled through sanctions contexts. In a gravity trade model, the aggregate indicator is negative, large, and statistically significant, but the decomposition reveals that only two layers drive the result. Kinetic conflict and trade-context hostility are both economically large and precisely estimated; routine diplomacy, despite dominating measured hostility, has no trade effect at all. The directed structure uncovers a retaliation channel that compounds trade losses over several months. Our measure remains a robust determinant of international trade in a horse race against closest alternative bilateral indicators. Relative to a pre-escalation baseline, the geopolitical deterioration of the past decade has put roughly $334 billion of bilateral trade at risk, with the US–China pair accounting for half. |
| JEL: | F15 F43 F5 F50 F51 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35077 |
| By: | Joseph Kopecky (Department of Economics, Trinity College Dublin) |
| Abstract: | As major powers deploy trade policy as coercion, what fiscal capacity does a currency union need to sustain a credible collective response? I embed the multi‐sector trade model of Caliendo and Parro (2015) into a monetary union with heterogeneous members, calibrated to the world input‐output database (WIOD) for 20 individual Eurozone members. A US tariff escalation of 20% plus EU retaliation requires 0.69% of Eurozone GDP (€97 billion); a Chinese critical minerals restriction requires 0.44% (€62 billion); both simultaneously require 1.12% (€157 billion). A substantial share of the fiscal need arises from the asymmetric costs of collective action itself: the costs that EU counter‐tariffs impose on members with concentrated trade exposures. This reframes the fiscal requirement as the price of strategic credibility. Single market deepening generates welfare gains, but barely reduces the fiscal requirement, showing that integration and fiscal capacity are complements. Joint borrowing is needed, as budget‐balanced redistribution cannot sustain collective action. However, the headline fiscal requirement is an upper bound. Embedding the model in existing EU institutions (cross‐conditionality of EU fiscal flows and qualified majority voting rules) reduces the practical requirement to 0.33% of Eurozone GDP (€46 billion) in the combined scenario, since the EU need only compensate a handful of pivotal large members to prevent a blocking minority. |
| Keywords: | Fiscal unions, currency unions, trade policy, economic coercion, Eurozone, strategic autonomy |
| JEL: | F13 F15 F42 F45 E62 H77 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:tcd:tcduee:tep0426new |
| By: | Subash Bhandari; Hyeongwoo Kim |
| Abstract: | This paper investigates the transmission of structural global oil market shocks to U.S. inflation using an IV-SVAR approach applied to highly disaggregated CPI components. We specifically utilize oil supply news shocks-market expectations of future OPEC production changes-and find that a news-driven 10% oil price increase triggers a significant 5% surge in headline inflation. Analyzing over 55 sectoral indexes reveals that these effects are heavily concentrated in energy-related goods, while other components remain muted or respond negatively. We identify consumer budget reallocation as a primary mitigating mechanism: households facing rising energy costs shift demand toward more affordable alternatives, such as used vehicles and food at home. By employing weak-instrument robust inference, this study demonstrates that headline inflation dynamics are driven by specific energy sub-components and adaptive consumer behavior rather than broad-based sectoral increases. |
| Keywords: | OPEC News Shock; Oil Supply Shock; Disaggregated CPI Components; Instrumental Variable Structural Vector Autoregression |
| JEL: | E3 F4 Q4 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:abn:wpaper:auwp2026-06 |