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on Open Economy Macroeconomics |
| By: | J. Scott Davis; Pon Sagnanert |
| Abstract: | During the initial weeks of the COVID-19 crisis, imbalances in the offshore dollar funding market led to safe-haven appreciation of the dollar. Fed swap lines between the U.S. central bank and counterparts abroad addressed these imbalances, subsequently helping reduce the cost of offshore dollar borrowing, reversing dollar appreciation and providing liquidity. |
| Keywords: | international economics; monetary policy; inflation; financial crises; COVID-19; swaps |
| Date: | 2024–05–21 |
| URL: | https://d.repec.org/n?u=RePEc:fip:d00001:98271 |
| By: | Simone Arrigoni; Massimo Ferrari |
| 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 a panel of 87 countries over the period 1966-2020, we show that household heterogeneity influences how foreign GDP responds to a US monetary policy tightening. GDP contracts by 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 that this divergence is driven by differences in participation in international financial markets. Households in emerging market economies face greater barriers to international investment, limiting their ability to re-balance portfolios towards higher-return foreign bonds after the shock. |
| Keywords: | US Monetary Policy, Spillovers, Income Inequality, Local Projections, State-Dependence |
| JEL: | D31 E21 E52 E58 F42 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:1043 |
| By: | Bahaj, Saleem; Fuchs, Marie; Reis, Ricardo |
| Abstract: | At the end of 2025, there were 177 cross-border liquidity lines between central banks connecting countries that accounted for 81% of world GDP. This paper maps the evolution of these arrangements since 2000. We show that the lines form a network through which banks can indirectly obtain access to the USD even when their central bank has no agreement with the Federal Reserve. These indirect connections give the People’s Bank of China a central role and show the fragility of liquidity provision to geopolitical tensions. We present cross-country evidence that the indirect connections reduce CIP deviations at the tails, and causal evidence that liquidity lines are substitutes to FX reserves. |
| Keywords: | swap lines; capital flow; financial crises; IMF; cross-currency basis |
| JEL: | E44 F33 G15 |
| Date: | 2026–05–31 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:137636 |
| By: | Moritz Pfeifer; Gunther Schnabl |
| Abstract: | This paper reassesses whether the euro area satisfies the criteria of an optimum currency area. It contrasts early hopes of convergence with subsequent developments marked by persistent heterogeneity across member states. Differences in economic structures, fiscal policies, and financial cycles have produced asymmetries that a single monetary policy cannot offset. Labor mobility and fiscal integration remain limited, shifting adjustment burdens onto prices, wages, and financial flows. Credit expansion and later retrenchment amplified divergence, culminating in the sovereign debt crisis. Since then, cohesion has relied heavily on unconventional monetary policies and fiscal support mechanisms, with notable effects on inflation dynamics, growth performance, and income distribution. The analysis concludes that the euro area has not evolved toward optimality and faces rising risks unless institutional reforms or structural changes are undertaken. |
| Keywords: | optimum currency area, European Monetary Union, economic convergence |
| JEL: | E52 F33 F45 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12675 |
| By: | Ugo Panizza (Geneva Graduate Institute and CEPR) |
| Abstract: | A well-designed European sovereign debt architecture should avoid debt mutualization, create a large safe asset, and reduce the risk of self-fulfilling crises. This note derives a European debt trilemma, showing that no feasible architecture can simultaneously achieve all three objectives. The note then develops a simple model to evaluate the Blanchard and Ubide (2025) proposal. The model establishes a safety condition justifying the 25 percent replacement threshold, average cost neutrality as a consequence of Modigliani–Miller, and, most importantly, strengthened fiscal discipline at the margin, since the rate on national bonds is strictly more sensitive to domestic fiscal conditions than the rate it replaces. |
| Keywords: | Eurobonds; European Safe Asset; Fiscal Discipline; Debt Seniority |
| JEL: | F34 F36 H63 E44 |
| Date: | 2026–05–18 |
| URL: | https://d.repec.org/n?u=RePEc:gii:giihei:heidwp15-2026 |
| By: | Marjan Petreski |
| Abstract: | This paper combines traditional panel econometrics with random forest machine learning to revisit the relationship between exchange rate regimes and economic growth for 27 transition economies over 1991-2019. Exploiting the Couharde-Grekou (2024) probabilistic synthesis classification, the random forest approach non-parametrically confirms and sharpens what fixed-effects and system GMM estimation establish parametrically intermediate exchange rate regimes consistently underperform fixed arrangements, with growth penalties ranging from -1.0 to -10.4 percentage points, while floating regimes show negative but largely insignificant differentials. Beyond regime effects, the machine learning analysis reveals that the intermediate regime penalty is sharpest precisely where institutions are weakest - non-parametric validation that institutional capacity, not regime label alone, determines whether exchange rate anchoring pays off. The regime-growth relationship is further concentrated in the pre-2003 stabilization era and is absent among EU member economies, suggesting the growth dividend from exchange rate anchoring eroded as institutional convergence advanced. Together, these findings demonstrate how machine learning variable importance metrics can corroborate and enrich causal inference from panel methods, while supporting the view that exchange rate anchoring carried a meaningful credibility dividend during the formative phase of transition. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2605.17391 |
| By: | Yevheniia Bondarenko; Nayeon Kang; Vivien Lewis; Matthias Rottner; Yves Schueler |
| Abstract: | Geopolitical risk is a major concern for the euro area, yet widely used measures largely reflect a US perspective. We introduce a geopolitical risk indicator tailored to the euro area using local European news sources. Shocks to this index have significant recessionary and inflationary consequences in the euro area, effects that would be missed when relying on the corresponding US-based measure. We estimate that the war in Ukraine imposed substantial output losses and inflationary pressures on the euro area in 2022. Combining structural scenario analysis with end-of-sample nowcasting, we show that euro area prospects are highly sensitive to future developments in geopolitical risk. We complement these analyses with two news-based measures of sanctions intensity and shortages for the euro area. |
| Keywords: | euro area, geopolitical risk, inflation, sanctions, shortages |
| JEL: | E31 E32 F42 F51 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1348 |
| By: | Mitchener, Kris James (Santa Clara University, CAGE, CESifo, CEPR & NBER); Pedemonte, Mathieu (Inter-American Development Bank) |
| Abstract: | Using newly digitized monthly data on the quantities and prices of imports as well as product-level data on tariff rates, we estimate that in the first year after the passage of the Smoot-Hawley Tariff Act, imports facing rate increases fell swiftly and dramatically relative to imports not affected by tariffs: for a one-percentage-point increase in the tariff rate, they declined by an average of 4%. We also estimate that the incidence of Smoot-Hawley was almost entirely borne by U.S. importers. Using an open economy model, we attribute our high measured short-run trade elasticity of greater than 4 to fixed exchange rates that the U.S. maintained with most trade partners in the first 15 months after enactment. Our model also suggests that Smoot-Hawley ac counted for 27% of the decline in total US imports in the first year after enactment. Finally, we construct both partial equilibrium and general equilibrium welfare estimates of Smoot-Hawley. Both methods deliver welfare losses of about 0.2% of GDP, reflecting the high measured elasticity of substitution and low US import-GDP ratio. |
| Keywords: | Trade policy, pass through, Smoot-Hawley Tariff, trade elasticity, international trade, tariff incidence, welfare analysis of tariffs JEL Classification: F10, F13, F14, F63, F68, N12, N72 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:cge:wacage:805 |
| By: | K. Peren Arin; Ozan Eksi; Neslihan Kaya Eksi; Moo-Sung Kim |
| Abstract: | We examine the international transmission of US monetary policy shocks to European firms using high-frequency identification and granular firm-level panel data. Exploiting monetary policy surprises around FOMC announcements combined with firm-level data across eight European economies over 2004-2024, we document a sharp divergence in spillover effects. A contractionary US monetary shock significantly reduces investment rates and sales growth among UK firms, with investment declining by approximately 4% and sales growth by around 0.7-0.8% at peak, with effects persisting for two to four years. By contrast, Continental European firms, whether members of the euro area or independent-currency economies such as Sweden and Switzerland, do not exhibit a significant response. Heterogeneity analysis reveals that large and small UK firms bear broadly similar average burdens, with large firms showing more precisely estimated responses, while leverage does not systematically differentiate transmission. The UK-EU divergence is not explained by the exchange rate regime: the null result for Continental Europe extends to non-euro countries, pointing instead to the exceptional depth of UK-US financial integration, and the centrality of London in global dollar funding markets. |
| Keywords: | monetary policy spillovers, firm-level heterogeneity, international transmission channels |
| JEL: | E52 F43 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-33 |
| By: | Cara Bordier; Lukas Frei; Simon Stalder |
| Abstract: | The US dollar (USD) is involved in 88% of global foreign exchange transactions, partly due to its role as a vehicle currency. Using high-frequency data from primary interdealer platforms, we develop a novel methodology to identify USD cross-trades. We show both theoretically and empirically that such trades can generate price fluctuations in USD exchange rates. Employing an instrumental variables approach, we find that increased cross-trading activity amplifies aggregate USD volatility. These results highlight a fundamental trade-off: while dollar dominance enhances market liquidity, it also increases the currency’s exposure to shocks originating in other currency pairs. |
| Keywords: | Dollar dominance, Volatility, Foreign exchange markets, High-frequency trading |
| JEL: | F31 G12 G14 G15 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:snb:snbwpa:2026-05 |
| By: | Bondarenko, Yevheniia; Kang, Nayeon; Lewis, Vivien; Rottner, Matthias; Schüler, Yves |
| Abstract: | Geopolitical risk is a major concern for the euro area, yet widely used measures largely reflect a US perspective. We introduce a geopolitical risk indicator tailored to the euro area using local European news sources. Shocks to this index have significant recessionary and inflationary consequences in the euro area, effects that would be missed when relying on the corresponding US-based measure. We estimate that the Russo-Ukrainian War imposed substantial output losses and inflationary pressures on the euro area in 2022. Combining structural scenario analysis with end-of-sample now-casting, we show that euro area prospects are highly sensitive to future developments in geopolitical risk. We complement these analyses with two news-based measures of sanctions intensity and shortages for the euro area. |
| Keywords: | euro area, geopolitical risk, inflation, sanctions, shortages |
| JEL: | E31 E32 F42 F51 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:341100 |
| By: | Claudia Ciccone (Roma Tre University.) |
| Abstract: | The recent reform of the European fiscal governance framework has been portrayed as a break with the austerity logic of the past. Yet its core logic remains largely unchanged. This paper investigates the possible effects of the fiscal consolidations required under the new European fiscal rules on Italy's debt-to-GDP ratio. Drawing on the reference trajectory for net primary expenditure transmitted by the European Commission to Italy in June 2024, the analysis shows that the projected decline in the debt-to-GDP ratio relies on an assumption for which the Commission gives no justification: that the contractionary effects of fiscal consolidation on GDP are only temporary and fully dissipate three years after the adjustment period. Once this assumption is removed and the effects of consolidation are allowed to persist - as suggested by empirical evidence on hysteresis - GDP growth weakens substantially, and the debt-to-GDP ratio may increase rather than decrease. The findings suggest that the new governance framework may lead to the pro-cyclical tightening, weaker growth and adverse debt dynamics that characterized earlier phases of EU fiscal governance. |
| Keywords: | Fiscal policy; European economic governance; Debt sustainability; Fiscal consolidation; Net primary expenditure; Potential Output; Output gap; Fiscal multipliers; Austerity. |
| JEL: | E02 E32 E6 E62 F42 H61 H62 H63 H68 |
| Date: | 2025–11–19 |
| URL: | https://d.repec.org/n?u=RePEc:thk:wpaper:inetwp243 |
| By: | Ronald Albers; Staffan Lindén |
| Abstract: | The paper proposes an explanatory framework to account for long-term movements in the nominal rate of the Swedish krona against the euro. A model with few variables (short-term interest rate differentials, broad money and a measure of market volatility) tracks trend developments quite well. Our approach is anchored in purchasing power parity theory and empirics. The results show that interest rate differentials affect the exchange rate immediately, while broad money works more slowly as its effects take time to spread, but has a larger impact. The VIX, a measure of market uncertainty, captures short-term volatility and explains large swings during economic crises, consistent with the view that the Swedish krona is a risk-sensitive currency. This results in the euro-krona nominal exchange rate showing broad alignment with purchasing power parity measures over a longer period. |
| Keywords: | Euro-Swedish krona, exchange rates, purchasing power parity, effective exchange rates, uncovered interest parity. |
| JEL: | C3 E31 E4 F31 F37 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:euf:ecobri:090 |
| By: | Martin, Reiner; Nagy Mohácsi, Piroska |
| Abstract: | The post-pandemic inflation surge tested monetary policy frameworks around the world. It was a particular test for the four Visegrad countries (V4) in Central-Eastern Europe, which provided a “natural experiment” to examine monetary policy outcomes under two different monetary regimes. With broadly similar economic characteristics, Slovakia was already in the Economic and Monetary Union (EMU) before the post-pandemic inflation hit, whereas the other three countries (Czechia, Hungary and Poland) were not. What was the inflation performance of the V4 countries under the two different regimes? What does this imply for the cost/benefit analysis of euro adoption for countries which are still outside the euro area? We find that EMU membership was beneficial both during “normal times” as the benefits of monetary sovereignty for small, open, integrated economies faded away, and particularly helpful during crisis times. |
| Keywords: | Central-Eastern Europe; ECB; EMU; Euro area; inflation; monetary policy |
| JEL: | E31 E42 E52 E58 F02 F31 |
| Date: | 2024–12–23 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:137978 |
| By: | Gabriel Rodriguez (Departamento de Economía de la Pontificia Universidad Católica del Perú); Luis Mancilla Marquina (Departamento de Economía de la Pontificia Universidad Católica del Perú) |
| Abstract: | This paper tests the hypothesis of self-defeating fiscal austerity (Attinasi and Metelli, 2017; Cherif and Hasanov, 2018), using a time-varying parameter vector autoregression with stochastic volatility (TVP-VAR-SV) model estimated on Peruvian data for 2000Q2–2024Q2. The central objective is to assess whether, following a transitory fiscal austerity shock, the debt-to-GDP ratio declines in the long run. If debt fails to decrease—or rises—over time, fiscal policy would be deemed self-defeating for the period under study, reflecting the contraction in economic activity that typically accompanies fiscal tightening. The paper also examines the role of exchange rate dynamics in fiscal consolidation—an aspect largely unexplored in the literature. A family of models with time-varying parameters and stochastic volatility is estimated to evaluate whether these features are essential for an adequate model fit. The results provide evidence against the self-defeating austerity hypothesis: the long-run cumulative response of the debt-to-GDP ratio stabilizes roughly 0.6 percentage points of GDP below its no-shock path. The findings underscore the importance of the exchange rate channel in enhancing the effectiveness of austerity shocks. However, fiscal stabilization becomes ineffective when achieved through expenditure cuts rather than revenue measures, as spending-based austerity dampens GDP growth and exhibits limited persistence, weakening its long-term effect. Palabras claves: Función de Reacción Fiscal, Choques de Austeridad, Austeridad Fiscal, Deuda Pública, Sostenibilidad Fiscal, Parámetros Cambiantes en el Tiempo, Volatilidad Estocástica JEL Classification-JE: C11, E32, E62 |
| Keywords: | Fiscal Reaction Function, Austerity Shocks, Fiscal Austerity, Public Debt, Fiscal Sustainability, Time-Varying Parameters, Stochastic Volatility. |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:pcp:pucwps:wp00555 |
| By: | Stefan Tanevski; Marjan Petreski |
| Abstract: | This paper investigates how institutional rigidities shape inflation persistence in transition economies, focusing on labor market institutions and exchange rate regimes. Using a large panel of transition countries over the period 2013-2024, the analysis combines newly constructed indices of wage rigidity and labor protection, derived from AI-assisted coding of legal texts, with de facto measures of exchange rate regime rigidity and standard macroeconomic controls. The empirical strategy adopts a dynamic panel framework in which inflation persistence is conditioned on institutional characteristics through interaction terms, estimated using GMM techniques. Identification follows a cohort-based approach, comparing inflation dynamics across countries with different institutional configurations. To address potential measurement and classification uncertainty in institutional variables, the analysis incorporates a simulation-based sensitivity framework. The results show that inflation persistence varies systematically across institutional settings. Both wage rigidity and exchange rate regime rigidity tend to dampen inflation persistence, indicating that institutional constraints can weaken the transmission of past inflation into current price dynamics. This effect is particularly strong and robust for exchange rate regimes, while the effect of wage rigidity is more sensitive to measurement assumptions. Findings highlight the importance of institutional structures in shaping inflation processes and suggest that nominal rigidities may play a stabilizing role in certain macroeconomic environments. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2605.16862 |
| By: | Jiheum Yeon (KOREA INSTITUTE FOR INTERNATIONAL ECONOMIC POLICY (KIEP)); Xiaohan Zhang (University of International Business and Economics (UIBE)) |
| Abstract: | Digital platforms have become central to modern economies, as consumers increasingly spend leisure time online and platform firms transform user engagement into economic value. This study develops a multi-country, multi-industry open economy general equilibrium model to analyze how web traffic—measured as visits to platform domains—can be converted into “data capital” through big data and AI algorithms and then used as a non-rival input for production and innovation.<p> To ground the analysis, we construct a new dataset that links domain-level web traffic to corporate ownership across countries. The evidence reveals sharp cross country differences in the geographic origin of users. U.S. platforms attract a strongly international audience, with domestic users accounting for less than one-third of visits on average. Chinese platforms are more domestically concentrated, though TikTok stands out as a global exception with a highly international user base. Korean platforms, by contrast, rely overwhelmingly on domestic users, with less than ten percent of traffic originating abroad. Comparing these patterns with international service trade statistics, we find that countries with higher shares of foreign users are systematically more active in exporting online services.<p> Qualitative analysis provides further insight into user behavior. Consumers allocate more time to a platform when they experience greater content satisfaction, which depends on both technological quality and country-specific content preferences. When the quality of foreign platform content improves, consumers reallocate time away from domestic platforms toward foreign ones. The extent of this shift is influenced by the elasticity of leisure demand, the substitutability across platforms, and the share of time already devoted to foreign platforms.<p> The general equilibrium model allows us to simulate counterfactual scenarios and evaluate policy-relevant outcomes. Reducing cross-border frictions to foreign content raises welfare in all countries, primarily through the expansion of content variety and the reallocation of consumer time, while leaving the broader industrial structure largely unchanged. Lowering barriers faced by foreign platforms, such as discriminatory digital services taxes, increases platform revenues, encourages consumers to spend more leisure time online, and strengthens investment incentives for domestic platforms. Although the immediate welfare gains are modest, the longer-run effects on intangible investment and innovation are more significant. Enhancing the productivity of platform R&D generates asymmetric effects by expanding platform activity in the innovating country and reducing it in the non innovating country, yet global welfare increases because users everywhere benefit from improved content quality and diversity.<p> Taken together, the findings highlight that the accumulation of web-traffic-based data capital is a central driver of platform growth. Policies that improve access to foreign content, the taxation of digital services, and foster innovation in platform R&D directly influence how consumer time is allocated and how platform firms invest in data-driven growth. For policymakers, the results suggest that lowering barriers to cross-border online activity can deliver substantial welfare gains, that digital taxation should be carefully designed to balance fiscal and innovation objectives, and that investment in platform R&D is essential for competitiveness in the global digital economy.<p> In sum, this study demonstrates that digital platforms thrive not only on technological progress but also on the ability to accumulate and deploy data capital derived from web traffic. Recognizing the economic role of data capital is crucial for designing effective policies in the digital era, where market access, taxation, and innovation shape the international competitiveness of platform industries. |
| Keywords: | Cross-country time allocation; Online leisure; Digital Platforms; Cross country services trade; Non-rivalry; Intangible Capital; Zero Prices |
| JEL: | F41 E22 J22 L86 |
| Date: | 2025–11–14 |
| URL: | https://d.repec.org/n?u=RePEc:ris:kiepwp:022488 |
| By: | Martha Elena Delgado Rojas; Juan Herreño; Marc Hofstetter; Mathieu Pedemonte |
| Abstract: | We construct a novel measure of one-year-ahead exchange rate forecasts and nowcasts for non-financial firms. We then study a randomized information intervention that provides a subset of firms with a publicly available exchange rate forecast. This information treatment persistently shifts exchange rate expectations and perceptions, with stronger effects for non-exporting firms. We link survey responses with administrative customs data and estimate a positive intertemporal elasticity of import demand to exogenous changes in expected future exchange rates. Our findings highlight the role of intertemporal substitution after anticipated changes in trade costs. |
| JEL: | E31 E71 F31 G41 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35175 |
| By: | Adnan Velic (Technological University Dublin) |
| Abstract: | This paper studies Ireland's idiosyncratic inflation dynamics. We find that Irish inflation is highly susceptible to trends in international inflation. Our results indicate that international inflation's gravitational pull strengthens over time, particularly in the decade leading up to the Global Financial Crisis, after which we see some signs of waning in inflation comovements. The results also suggest that goods are more responsible for higher speeds of convergence toward international inflation than services, which tend to exert more downward pressures. Adjustments in deviations from international inflation are found to be highly nonlinear. While shock persistence for moderate to large inflation gaps is negligible, half‐lives are in excess of a year for small deviations from international inflation. We find that factors such as economic size and openness attenuate inflation gaps by enhancing comovements with international inflation. While the impact on idiosyncratic inflation inertia depends on the absolute size of the inflation deviation, it also relies on how covariates influence market frictions and thus the rate of adjustment for a given inflation gap. This implies that the net effect hinges on the stronger channel in the case of opposing forces. |
| Keywords: | Irish inflation dynamics, international comovements, inflation gaps, nonlinearities, persistence |
| JEL: | E31 E32 F41 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:tcd:tcduee:tep1026 |
| By: | Thuy Hang Duong; Weifeng Larry Liu |
| Abstract: | This paper examines the short-run price effects of US tariffs during the Trump administrations. Using a monthly industry-level event-study with staggered treatment timing, we estimate their impacts on domestic producer price inflation across two trade war episodes over 2018-2019 and 2024-2025. The results show that tariffs increased inflation in both episodes, but the magnitude and persistence differed. In 2018-2019, tariffs led to large and sustained price increases, driven by strong cost pass-through from imported intermediate inputs from China. In contrast, in 2024-2025, despite more aggressive tariff measures, inflationary effects were not proportionally larger and dissipated more quickly. This attenuation reflects global supply chain reallocation following the first US-China trade war and the COVID-19 pandemic, as US firms diversified away from Chinese inputs, weakening input-cost transmission. |
| Keywords: | tariffs, inflation, trade war, event-study design |
| JEL: | E31 F13 F14 L11 C23 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-30 |
| By: | Shoumitro Chatterjee (Johns Hopkins University); Arvind Subramanian (Peterson Institute for International Economics) |
| Abstract: | Concern over China's trade surplus is again resurging in the United States and Europe, but less attention has been paid to what China's surplus means for low- and middle-income countries. Despite becoming a richer and higher-tech economy, China continues to occupy a large share of global low-skill-intensive export markets such as apparel and footwear, precisely where low- and middle-income countries compete most directly. The authors document what they call a "China Squeeze, " which is limiting the industrialization opportunities traditionally used by these countries to grow their economies and create jobs. -Key Takeaways - The "China Squeeze" affects low- and middle-income countries through three major channels: intense competition in global export markets, rising Chinese import competition in their own domestic markets, and limited access to China's own consumer market for low-skill-intensive exports from developing countries. - The scale of the squeeze is historically unprecedented and may represent hundreds of billions of dollars in lost exports and forgone jobs in labor-intensive manufacturing in developing countries. - Macro indicators on wages, productivity, and exchange rate policy suggest that distortions, especially an undervalued renminbi, may have played a role. Regardless of the cause, China's dominance may be closing off the traditional manufacturing-led development path for low- and middle-income countries. |
| Keywords: | China, export competition, low- and middle-income countries, industrialization, low-skill manufacturing, value-added trade, China shock, exchange-rate policy |
| JEL: | F13 F14 F16 F43 F63 O14 O19 O24 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:iie:wpaper:wp26-7 |
| By: | Ozan Eksi; K. Peren Arin; Neslihan Kaya Eksi; Moo-Sung Kim |
| Abstract: | This paper investigates the international transmission of Federal Reserve monetary policy shocks to European firms across four firm-level outcomes: investment, sales growth, profit margins, and debt growth. Using high-frequency identification of Fed shocks combined with local projections on firm-level panel data from five Eurozone countries over 2004-2024, we find that Fed tightening reduces investment and sales, leaves profit margins largely unchanged, and increases debt accumulation. These effects are broadly observed across sectors, with Wholesale Retail Trade and Manufacturing somewhat more affected, while Agriculture, Forestry, Fishing, and Services (Health and Education) remain largely irresponsive across all outcomes. The Finance, Insurance, and Real Estate sector is a notable exception, exhibiting a positive investment response to Fed tightening. All results are robust to controlling for concurrent ECB policy shocks, highlighting the independent global reach of U.S. monetary policy through international credit and dollar funding channels. |
| Keywords: | monetary policy transmission, sectoral heterogeneity, high-frequency identification, local projections |
| JEL: | C32 E52 E58 F42 G31 L16 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-32 |