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on Open Economy Macroeconomics |
| By: | Volha Audzei; Michal Franta |
| Abstract: | The paper examines international spillovers of euro area (EA) monetary policy to the real economy of an advanced small open economy with a high degree of credit euroization and close trade links with the EA. We focus on Czechia, as it has a similar degree of trade and financial integration with the EA as the rest of the non-EA countries in the region. Based on firm-level data and high-frequency identified monetary policy shocks, we assess the channels of EA monetary policy spillovers. More precisely, we estimate the responses of investment by Czech firms to EA monetary policy shocks using panel local projections and compare the responses for various groups of firms. The results suggest the presence of the trade channel of spillover transmission. Some evidence is found for the balance sheet channel. The foreign currency borrowing cost channel is detected after 2014, suggesting that the high degree of credit euroization in Czechia has altered the transmission of spillovers of EA monetary policy. Importantly, the overall spillovers from the EA have weakened significantly since 2014. |
| Keywords: | Credit euroization, Investment of firms, Small open economy, Transmission channels |
| JEL: | C23 D22 E52 F41 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:cnb:wpaper:2026/05 |
| By: | Arrigoni, Simone; Ferrari Minesso, Massimo |
| Abstract: | This paper provides novel evidence on how income inequality shapes the heterogeneity of US monetary policy spillovers to GDP across foreign economies. Using state-dependent local projections and exploiting variation in disposable income inequality across 87 countries over 1966-2020, we show that household heterogeneity influences how foreign GDP responds to a US monetary tightening. GDP contracts up to one and a half times more when inequality is above average. However, while higher inequality amplifies negative spillovers in advanced economies, it mitigates them in emerging markets. To rationalise this finding, we use a three-country open economy Two-Agent New Keynesian (TANK) model, which suggests this divergence is driven by differences in participation in international financial markets. Households in emerging markets face greater barriers to international investment, limiting their ability to re-balance portfolios towards higher-return foreign bonds after the shock. JEL Classification: D31, E21, E52, E58, F42 |
| Keywords: | income inequality, local projections, spillovers, state-dependence, US monetary policy |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263221 |
| By: | Andrés Fernández (International Monetary Fund); Alejandro Vicondoa (Pontificia Universidad Católica de Chile) |
| Abstract: | We study the joint dynamics in the volume and prices of capital flows to emerging market economies (EMEs). A dynamic factor model augmented with sign and zero restrictions allows us to identify demand/supply shocks of idiosyncratic/common nature. While common credit supply shocks are the main driver of prices, idiosyncratic credit demand and supply shocks account for most of the variation in quantities. A structural multi-country SOE/RBC model is calibrated to EMEs data to further shed light on the main transmission channels. Augmented with correlated productivity and interest rate shocks, the model matches the comovement between prices and quantities as well as business cycle moments. Common credit demand drivers, captured as correlated TFP shocks, account for around half of the observed comovement in quantities but they are not a significant driver of price comovement. Fundamentals matter significantly more for capital flows than for country spreads, which are driven by a sizeable global financial cycle. |
| Keywords: | capital flows, sovereign spread, small open economy, credit supply, credit demand, external factors |
| JEL: | E31 E32 E43 E52 E58 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:aoz:wpaper:393 |
| By: | Pierre De Leo; Lorena Keller; Giuliano Simoncelli; Mauricio Villamizar Villegas; Tomas Williams |
| Abstract: | When foreign investors acquire local-currency bonds, they must also exchange foreign for local currency. In a model with intermediation frictions, foreign inflows thus generate correlated movements in intermediaries' bond and currency positions, and, in turn, in term and currency premia. Using data from Colombia's bond and foreign exchange markets, we show that this mechanism accounts for key empirical patterns in intermediaries’ positions, bond yields, and exchange rates—including during inflow episodes, and in response to asset purchase policies. Consistent with the model, countries with more prevalent unhedged foreign investor flows exhibit stronger positive comovement between bond and currency returns. |
| Keywords: | foreign investors; local-currency bond markets; exchange rates; bond yields; financial intermediaries; capital flows. |
| JEL: | E43 E52 F31 G12 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:gwc:wpaper:2026-007 |
| By: | George Cui; Xiaosheng Guo; Leticia Juarez |
| Abstract: | This paper examines the impact of trade credit and bank loans on firms’ exchange rate passthrough. Using a comprehensive dataset combining customs transaction records and balance sheet data for Chinese exporters during 2000–2011, we document that firms that more intensively extend trade credit to their buyers exhibit more complete exchange rate pass-through. Further empirical investigation sheds light on the underlying mechanism. First, the use of trade credit is positively correlated with exporters’ dependence on bank loans. Second, firm-level bank loan interest rates decline following home currency depreciation. Motivated by these findings, we develop a theoretical model in which exporters constrained by working capital simultaneously extend trade credit to buyers and rely on bank borrowing. The model shows that home currency depreciation improves exporters’ profitability, lowers default risk, and reduces borrowing costs, ultimately enhancing exchange rate pass-through. By endogenizing the interest rate through firm-level default risk, the model reveals a novel channel through which firms’ financial activities shape the dynamics of exchange rate pass-through. |
| Keywords: | Exchange rate pass-through; Trade credit; Financial constraints |
| Date: | 2026–04–24 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/084 |
| By: | Tomas Sestorad; Jan Vlcek; Karel Musil |
| Abstract: | This paper examines how alternative definitions of the output gap influence the dynamics and monetary policy prescriptions of New Keynesian DSGE models used in inflation-targeting regimes. Using the Czech economy as an example of a small open economy, we compare one exogenous and seven endogenous output-gap measures, including flexible equilibrium concepts, statistical filters, and structural approaches. The results show that endogenous identification is essential for ensuring internal consistency among business cycle fluctuations and other macroeconomic variables, while only structurally identified gaps fully exploit the advantages of the DSGE framework. Technology-augmented output emerges as the most operationally robust and conceptually coherent measure for real-side policy analysis. The findings further highlight that the policy implications of output-gap stabilization are determined by the chosen measure, which should align with the policymaker's preferences. Because these mechanisms are structural rather than country-specific, the conclusions extend to other small open economies with similar characteristics. |
| Keywords: | Business cycle, DSGE model, flexible equilibrium, HP filter, monetary policy, output gap, real marginal costs, technological growth |
| JEL: | D58 E32 F41 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:cnb:wpaper:2026/03 |
| By: | Giancarlo Corsetti; Keith Kuester; Gernot J. Müller; Sebastian Schmidt; Ben Schumann; Gernot Müller |
| Abstract: | We confront the notion that flexible exchange rates insulate countries from external disturbances with new evidence for the euro area (EA) and 20 of its neighbors. Using high-frequency data, we first establish that countries with flexible exchange rates ("floats") let their currencies depreciate in response to EA monetary policy shocks, while "pegs" raise interest rates. Yet at business cycle frequency, these depreciations do not translate into insulation: floats contract just as much as pegs—not only in response to monetary policy shocks but also to other shocks originating in the EA. This result appears puzzling in light of received wisdom, but we show that it can be rationalized within a state-of-the-art HANK model and flesh out the underlying transmission channels. |
| Keywords: | exchange-rate regime, Insulation, external shock, exchange-rate disconnect, monetary policy |
| JEL: | F42 E31 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12635 |
| By: | Eerola, Essi; Peltonen, Juho; Pönkä, Harri |
| Abstract: | This paper describes the framework used by the Bank of Finland to assess the cost competitiveness of the Finnish economy. We discuss the conceptual foundations, data choices, and methodological trade-offs involved in constructing commonly used indicators, with particular emphasis on labour-cost-based measures in a monetary union context. The analysis focuses on compensation per employee and unit labour costs for the whole economy, complemented by indicators for the manufacturing sector as a proxy for tradable activities. Using national accounts data and the European Commission's Autumn 2025 forecast, we illustrate the indicators and evaluate their robustness to alternative methodological choices. Overall, the results show that while different indicators highlight somewhat different aspects of cost competitiveness, the main conclusions are robust to reasonable variations in reference groups, weighting schemes, and adjustments. The paper aims to provide a transparent and consistent basis for interpreting Finland's cost competitiveness and to support informed policy discussions. |
| Keywords: | cost competitiveness, compensation per employee, unit labour costs |
| JEL: | F10 F40 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofecr:340861 |
| By: | Cássio da Silva Brum; Daniel Arruda Coronel; Jose Luis Oreiro |
| Abstract: | This article analyzed the impact of Foreign Direct Investment (FDI) on the competitiveness of high- and medium-technology exports in Latin America and the Caribbean (2002–2021). The econometric results indicated a negative impact of FDI on the competitiveness of exports in countries with lower per capita income, using the Autoregressive Distributed Lag (ARDL) model, estimated by Pooled Mean Group (PMG). However, this impact can become positive after a specific threshold of per capita income; that is, the empirical results revealed a non-linear relationship between the effects of FDI on export competitiveness and the per capita income level of the countries in the sample. The empirical evidence presented in the article showed that FDI harms the competitiveness of exports in countries with low per capita income but becomes beneficial after a critical value of US$ 5, 172.44. This dynamic is due to the greater absorptive capacity of technologies entering through this channel (FDI) in countries with higher per capita income levels, as they have more consolidated, mature, and competitive companies. In contrast, low-income countries may have their companies displaced from the market, decreasing their competitiveness. The robustness of the econometric evidence is confirmed by the Error Correction Term (ECT) of -0.74, indicating a rapid adjustment (74% per year) to long-term equilibrium. The article concludes that institutional development and domestic income are preconditions for foreign capital to be able to drive regional technological sophistication. |
| Keywords: | International trade; Technological competitiveness; Multinational companies |
| JEL: | F20 F21 F43 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:pke:wpaper:pkwp2613 |