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on Open Economy Macroeconomics |
| By: | Alberto Montagnoli; Miroslava Quiroga-Trevino; Christoph Thoenissen |
| Abstract: | This paper provides empirical evidence on the balance sheet channel of ï¬ scal policy in peripheral European economies. Our ï¬ ndings using a Panel VAR, reveal that shifts in ï¬ nancial institutions' balance sheets following a debt-ï¬ nanced ï¬ scal expansion reduce credit provision and investment in these countries. Moreover, the analysis indicates that economies with higher sovereign exposure experience more severe credit crunches and investment declines. To explore the underlying mechanisms, we employ a DSGE model that incorporates banks as primary holders of sovereign debt. The model shows that sovereign exposure ampliï¬ es the negative effects on credit supply, lowering investment and capital formation. |
| Keywords: | SVAR, DSGE, Bayesian estimation, ï¬ scal policy, sovereign debt, bank capital regulation, crowding out, Euro Area |
| JEL: | C11 E32 E44 E62 H63 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-42 |
| By: | Wabenga, James Yango; Nlemfu Mukoko, Jean Blaise |
| Abstract: | This paper examines the transmission of external monetary disturbances in a highly dollarized small open economy, using the Democratic Republic of Congo (DRC) as a representative case. We develop a tractable open-economy model featuring partial dollarization, incomplete price adjustment, and an endogenous risk premium linked to interest rate differentials. The framework captures the key mechanisms through which foreign financial conditions interact with domestic monetary dynamics. Model simulations indicate that a U.S. interest rate tightening generates an immediate and significant depreciation of the domestic currency, accompanied by rising risk premia and inflationary pressures. Money supply shocks produce amplified exchange rate and price level responses due to weakened real money demand under dollarization, while risk premium shocks generate additional volatility through expectation-driven dynamics. Across all shock types, domestic monetary policy exhibits limited capacity to counteract external disturbances. The results show that dollarization changes how monetary shocks spread by reducing policy independence and increasing the impact of global financial conditions. The analysis provides a quantitative foundation for understanding macroeconomic swings in dollarized economies and indicates that stabilization requires additional tools beyond traditional interest-rate policies. |
| Keywords: | Exchange rate dynamics, dollarization, monetary policy spillovers, Democratic Republic of Congo, commodity prices |
| JEL: | E52 F31 F41 O55 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:129083 |
| By: | Arizmendi, Luis-Felipe |
| Abstract: | This study evaluates the bilateral economic corridor between Bangladesh and Spain (2000–2025). Using an augmented gravity model with HAC standard errors, results reveal that Bangladesh’s export volume is highly elastic with respect to domestic GDP growth (β = 2.20) and decoupled from Spanish business cycles. Structural break analysis shows that post-2013 compliance reforms increased buyer trust, although growth elasticity is maturing. Building on evidence from sustainable finance, the paper argues that after Bangladesh’s LDC graduation in 2029, high-transparency ESG lending will be essential to meet EU requirements. The strategic recommendations, therefore, emphasize industrial upgrading and export diversification to sustain this important economic partnership. |
| Keywords: | Bilateral trade, Augmented gravity model, LDC graduation, ESG compliance, Sustainable lending, Spain-Bangladesh relations. |
| JEL: | F14 F16 F43 O15 |
| Date: | 2026–05–16 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:129179 |
| By: | Naef, Alain |
| Abstract: | Foreign exchange intervention is widely used across low, middle and high income economies, yet its effectiveness remains disputed. The central difficulty is identification: interventions are typically endogenous to exchange rate movements, often bundled with other policies and sometimes unobserved. This survey reviews five decades of empirical research and reframes the debate as a problem of causal identification rather than a binary question of whether intervention works. The literature is organized by identification strategy: event studies, reaction-function residuals, controlled regressions, instrumental variables, high-frequency approaches, SVARs, structural portfolio-balance models and natural experiments. For each design, the source of identifying variation and the key assumptions required for causal interpretation are specified. Differences in reported effectiveness largely reflect differences in design, data and regime context. The overall finding is that intervention does affect exchange rates: evidence is strongest for short-run effects on returns and volatility, especially when operations are large, well-timed and implemented in thinner markets. Persistent exchange rate level effects are more sensitive to assumptions about asset substitutability, expectations and financial frictions. The survey provides guidance for empirical practice and highlights priorities for improved measurement and future research. |
| Date: | 2026–05–20 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:wp7bg_v1 |
| By: | Zhiruo Zhang; Firmin Doko Tchatoka; Qazi Haque |
| Abstract: | We develop a Bayesian framework that combines adaptive shrinkage with variable selection to address over-parameterisation and sparsity in high-dimensional panel vector autoregressions (PVARs). The proposed approach employs Laplace-based spike-and-slab priors to enable flexible modelling of dynamic cross-sectional interdependencies and unit-specific heterogeneity. Monte Carlo evidence shows that the method delivers improvements in estimation accuracy and forecasting performance relative to existing regularisation approaches. We illustrate its empirical relevance in two applications. The first investigates financial contagion in euro area sovereign bond markets, while the second examines international forecasting performance in a multi-country macroeconomic panel. The results highlight the benefits of adaptive, component-specific shrinkage for capturing heterogeneous spillover structures in complex panel systems. |
| Keywords: | dynamic interdependency, cross-sectional heterogeneity, Bayesian Lasso, variable selection, spike and slab prior, financial contagion |
| JEL: | C32 C54 C55 E17 F41 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-40 |
| By: | Sangyup Choi; Jongho Park; Kwangyong Park |
| Abstract: | What accounts for cross-country heterogeneity in exchange-rate responses to U.S. monetary policy shocks? Using daily data around Federal Open Market Committee (FOMC) announcements for 34 countries from 2001 to 2019, we show that countries with deeper financial markets experience larger currency depreciations following contractionary U.S. monetary policy shocks. This amplification is concentrated in forward-guidance shocks rather than contemporaneous target-rate surprises. The result is robust to alternative measures of financial market depth and to controls for domestic monetary policy responses, broad dollar movements, and various country characteristics. The amplification fades within approximately one month, suggesting that financial market depth matters primarily for high-frequency exchange-rate adjustment. A parsimonious portfolio-adjustment model interprets these empirical patterns by linking market depth to lower rebalancing costs and by treating forward guidance as news about future interest-rate differentials. |
| Keywords: | exchange rates, U.S. monetary policy, portfolio adjustment frictions, forward guidance, event study |
| JEL: | E52 F31 F41 G11 G17 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-43 |
| By: | Ben Soltane, Bassem |
| Abstract: | This study examines the dynamic interrelationship between transport infrastructure, foreign direct investment (FDI), and economic growth in Tunisia over the period 1996–2022. Motivated by the hypothesis that transport infrastructure stimulates FDI, which in turn enhances GDP per capita, the analysis adopts a Vector Autoregression (VAR) framework to capture the bidirectional linkages among the three variables. The study relies on annual time-series data drawn from the World Bank Open Data platform and the International Road Statistics (IRS). The results confirm that transport infrastructure positively influences FDI inflows, and that FDI subsequently contributes to economic growth, revealing a reinforcing cycle wherein improved infrastructure attracts investment, which then drives development. Granger causality tests support these directional links, while impulse response functions and variance decomposition illustrate the transmission mechanisms and evolving contribution of each variable to economic performance. These findings underscore the strategic importance of transport infrastructure in Tunisia’s development model and highlight the need for spatially inclusive investment, macroeconomic stability, and institutional efficiency. The study also addresses practical challenges, such as fiscal constraints and political uncertainty, and calls for future research focused on infrastructure typologies, private sector participation, and economic resilience in the face of global disruptions. |
| Keywords: | Transport infrastructure, Foreign Direct Investment (FDI), Economic growth, Vector Autoregression (VAR), Tunisia. |
| JEL: | C32 F21 F43 O11 O55 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:127901 |
| By: | Nundo Chilima (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: | This paper examines how external commodity shocks, exchange rate depreciation, and monetary policy shocks shape macroeconomic adjustment in Zambia. Using monthly data from 2010 to 2024, the analysis applies sign-restricted local projections to trace the responses of output, inflation, exchange rates, policy rates, and lending conditions. The copper-to-oil ratio serves as the baseline indicator of Zambia’s external commodity position because it captures copper export-price gains relative to oil import costs. Robustness checks use separate copper-price and oil-price systems, a longer signrestriction window, state-dependent specifications, and Bayesian VAR evidence. The results show that favorable copper-to-oil shocks lower inflation, ease lending conditions, support kwacha appreciation, and gradually raise output. Exchange-rate depreciation shocks generate persistent inflationary effects, confirming strong exchange-rate passthrough in Zambia´s import-dependent economy. Monetary-policy shocks reduce output and affect financial conditions, but do not produce a clean disinflationary response in the linear baseline, indicating constrained transmission and price-puzzle dynamics. State-dependent results show that transmission varies across inflation and commodity regimes, with weak commodity conditions amplifying inflationary and exchange-rate stress. The findings imply that stabilization in Zambia requires stronger external buffers, credible monetary-fiscal coordination, deeper financial intermediation, and reduced exposure to imported cost shocks. |
| Keywords: | Commodity prices; Copper-to-oil ratio; Exchange-rate pass-through; Monetary policy; Sign-restricted local projections; State dependence; Zambia |
| JEL: | E31 E52 F41 Q43 C32 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:fau:wpaper:wp2026_11 |
| By: | Marjit, Sugata; Das, Gouranga; Kar, Mausumi; Kar, Ujjayini; Yang, Lei |
| Abstract: | This paper analytically explores how FDI are affected by Tariffs as President Trump has imposed retaliatory tariffs on countries which have trade surplus with US and declared this as a strategy to attract tariff jumping FDI into US.. Our motivational empirical results show that with greater trade-openness, historically, greater trade deficit led to larger FDI into US. So correcting deficits artificially by a tariff would actually adversely impact FDI flows into US. We then show that:(i) based on the long-run Heckscher-Ohlin [HOS] model where capital is mobile and FDI is an avenue whereby capital outflows could occur based on the rate of return, for US type economy, return to capital will fall as Wage will rise via Stolper-Samuelson effects while for exporting trade-surplus economies like China, the result would be opposite as labor-intensive goods are taxed by US tariff. As return to capital rises, capital will outflow from USA; (ii) However, alternatively, in a very short-run scenario where inter-country capital flows are not so fast (immobile) and not-easy for moving out but within-country perfectly mobile, the outcomes could be very different. With sector-specific capital in the exporting trade-surplus economy, return to capital might fall in both places and the result can go either way. Historically free trade created the trade deficit but return to capital in USA was higher and attracted FDI. Thus, tariff escalation might go either way, without having much to do with controlling trade surplus or deficit. |
| Keywords: | Tariff war, Trade Deficit, Wages, Heckscher-Ohlin, Specific Factor, FDI, FPI, General Equilibrium |
| JEL: | F10 F11 F13 F40 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:glodps:1772 |
| By: | Felipe Benguria; Eugenio I. Rojas; Felipe Saffie |
| Abstract: | Countries borrow in dollars because dollar debt markets are deep and liquid. This paper develops a theory of when that dominance becomes fragile because countries have inherited dollar liabilities but increasingly earn yuan-linked revenues. In the model, countries begin with dollar-denominated sovereign debt. Geopolitical fragmentation raises their yuan revenue share through two channels: higher trade barriers with dollar-linked markets shift exports toward yuan-linked markets, and higher costs of using dollars in that trade make yuan settlement more attractive. Governments then face a choice: repay dollar debt using revenues that are less dollar-linked, default, or restructure into yuan. The paper identifies a liquidity spillover from restructuring: dollar-to-yuan restructurings deepen yuan debt markets, lowering refinancing costs and encouraging additional restructurings. The model shows when fragmentation produces limited restructuring and when it triggers a self-reinforcing shift from dollar debt to yuan debt. A cascade requires the liquidity feedback from yuan restructuring to be stronger than the dispersion in countries’ yuan revenue exposure. |
| JEL: | F36 F55 G15 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35272 |
| By: | Hung-Ju Chen (National Taiwan University); Hao Guo (Liaoning University); Chien-Yu Huang (International University of Japan); Yibai Yang (University of Macau) |
| Abstract: | This study explores the cross-country effects of inflation on innovation and technology transfer in a North-South variety-expansion model. We find that higher southern inflation causes a permanent increase in the North-South relative wage ratio, a temporary decrease in the northern innovation rate, and a permanent decrease in technology transfer. Higher northern inflation causes a permanent decrease in the North-South relative wage ratio, a temporary decrease in the northern innovation rate, and a permanent decrease (increase) in technology transfer if the southern population is sufficiently small (large). We calculate the model to the China-US data to justify the model implications. |
| Keywords: | Inflation; Innovation; North-South product cycles; R&D; Technology transfer |
| JEL: | E41 F43 O30 O40 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:iuj:wpaper:ems_2026_10 |
| By: | Mohades, Siavash |
| Abstract: | This paper develops a quantitative theory of how political distortions in fiscal policy generate public debt accumulation inside a currency union. The model has two member states that share a common monetary authority. The North government maximises resident welfare. The South government maximises a weighted average of welfare and incumbent vote share, which biases fiscal policy toward targeted transfers and away from broad public goods. The numerical solution closes the fiscal block with a reduced-form stationary debt rule around calibrated debt targets. In the baseline calibration, the political distortion lowers South public goods by about 45% relative to a benevolent South government and implies a consumption-equivalent welfare cost of 3.23% per period. A one-time adverse South political shock raises South debt by 0.56% relative to its steady-state level at peak, equivalent to about 0.68 percentage points of steady-state South output. Eight consecutive adverse political shocks raise South debt by about 4.43% relative to steady-state debt, equivalent to about 5.37 percentage points of steady-state South output. The mechanism is a deterioration in the primary balance caused by politically motivated transfer expansion. This pattern is robust to alternative home bias, vote sensitivity, political transfer elasticity, and debt targets. Additional exercises show that tighter fiscal rules reduce debt volatility but do not remove the underlying distortion, while an endogenous sovereign spread breaks local determinacy under first-order perturbation. |
| Keywords: | Political distortions; fiscal policy; public debt; currency union; targeted transfers; fiscal rules. |
| JEL: | D72 E61 F45 H63 |
| Date: | 2026–05–06 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:129004 |
| By: | Allayioti, Anastasia; Garratt, Anthony |
| Abstract: | Using a recent and comprehensive data set covering nine of the most actively traded currencies on a monthly basis from 1995 to 2024, this paper explores the presence and potential drivers of herding behaviour in foreign exchange rate forecasts. The dataset features an average of 40–50 forecasters per currency, representing a broader range of currencies, a longer time frame, and a larger cross section of forecasters than is commonly found in the FX herding literature. Our results provide mixed evidence on herding, where the balance tends towards anti-herding conclusions.While some revision-based tests suggest herding when current consensus forecasts are used, this evidence weakens considerably when lagged information is employed. In contrast, forecast-error based tests, Bernhardt et al. statistics, and over-reaction regressions more often point to anti-herding, particularly at longer horizons. Overall, we interpret the findings as suggesting thatdifferences among forecasters are largely attributable to heterogeneous views, noise, or idiosyncratic error rather than systematic convergence toward the consensus. When alternative explanations for expectation formation or revisions are considered, the main findings remain unchanged across a wide range of measures, including different types of uncertainty and FX predictors such as the forward premium, the real exchange rate, and the depreciation rate. JEL Classification: C10, C22, F31, F47, G17 |
| Keywords: | anti-herding, consensus forecasts, exchange rates, herding, individual forecasts, panel estimation |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263243 |
| By: | boughabi, houssam |
| Abstract: | This paper investigates the impact of low-interest rate policies on export performance in a small open economy under stochastic inflation and interest rate volatility, using Switzerland as a natural laboratory. We develop a continuous-time stochastic framework linking exports to inflation dynamics and policy-controlled short rates and implement Monte Carlo simulations to evaluate export trajectories under uncertainty. The results show that negative interest rates significantly support export performance despite deflationary pressures, while the effectiveness of the policy is largely invariant to the persistence (memory) of interest rate volatility. By integrating numerical modelling with approximation in a multi-periodic setting, the study provides both a methodological contribution and evidence on the trade channel of unconventional monetary policy. |
| Keywords: | interest rates; export dynamics; inflation volatility; stochastic modeling; monetary policy; Switzerland |
| JEL: | C15 E52 F41 |
| Date: | 2026–05–19 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:129149 |
| By: | Fernando Garcia; Guillermo Arcay (Harvard's Growth Lab); Ricardo Hausmann (Harvard's Growth Lab); Alejandro Werner |
| Abstract: | Bolivia’s macroeconomic crisis was long in the making. A temporary commodity windfall and a gas export engine built in the 1990s delivered a decade of growth, rising fiscal revenues, and an unprecedented buildup of foreign assets. But instead of using that window to build new sources of tradable income and productive capacity, the country adopted policies that gradually weakened the very gas sector on which the model depended. As gas production and hydrocarbon revenues fell, the state chose to preserve spending and the fixed exchange rate. The result was a sequence of increasingly costly stopgaps: first the depletion of international reserves, then the collapse of the peg, the rise of the inflation tax, and financial repression. In the process, households saw the real value of their savings eroded through the pension system and bank deposits. This paper shows how that strategy delayed adjustment for nearly a decade while making the eventual crisis more severe. Using counterfactual benchmarks for output and the real exchange rate, it quantifies the cost of delay and the scale of the distortions that any stabilization program must now unwind. |
| Keywords: | Bolivia |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:glh:wpfacu:261 |
| By: | Beuermann, Diether; Bottan, Nicolas L.; Hoffmann, Bridget; Khadan, Jeetendra; Vera-Cossio, Diego A. |
| Abstract: | We study how expert forecasts about inflation and nominal exchange rates affect households inflation perceptions, exchange rate beliefs, and later durable-goods holdings in a small open economy. Using a randomized information experiment in Suriname, we provide households with expert forecasts about future inflation and depreciation. At baseline, households substantially underestimate both inflation and depreciation, and the information treatments generate large upward revisions in expectations. Linking the experiment to follow-up data two years later, we find lower ownership of tradable durable goods among households exposed to macroeconomic forecasts, particularly consumer electronics. Results suggest that households interpret macroeconomic forecasts as informative about broader economic conditions rather than only about relative prices. |
| JEL: | D83 D90 E71 F31 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:14620 |