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on Open Economy Macroeconomics |
| By: | Broner, Fernando; Martín, Alberto; Meyer, Josefin; Trebesch, Christoph |
| Abstract: | How do shifts in the global balance of power shape the world economy? We propose a theory of alignment-based “hegemonic globalization, †built on two central premises: countries differ in their preferences over policies (such as the rule of law or regulatory frameworks) and trade between any two countries increases with the degree of alignment in these policies. Hegemons promote policy alignment and thereby facilitate deeper trade integration. A unipolar world, dominated by a single hegemon, tends to support globalization. However, the transition to a multipolar world can trigger fragmentation, which is particularly costly for the declining hegemon and its closest allies. To test the theory, we use international treaties as a proxy for alignment and compile a novel “Global Treaty Database, †covering 77, 000 agreements signed between 1800 and 2020. Consistent with the theory, we find that hegemons account for a disproportionate share of global treaty activity and that treaty-signing is a leading indicator of increasing bilateral trade. |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20339 |
| By: | Bacchetta, Philippe; Davis, J. Scott; van Wincoop, Eric |
| Abstract: | Global non-US banks have significant dollar exposure both on and off their balance sheet. We develop a model to analyze their adjustment to dollar funding shocks, whether from reduced direct lending or external dollar shortages. The model provides insight into banks’ responses through borrowing, lending, and FX swap positions, as well as the impact on their net worth, their probability of default and CIP deviations. Implications of the model are confronted with data on the response of non-US global banks to major dollar funding shocks. We examine the benefits from buffering these shocks through central bank dollar swap lines or local currency lending by the central bank. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20497 |
| By: | Javier Bianchi; Sebastian Horn; Giovanni Rosso; César Sosa-Padilla |
| Abstract: | This paper studies how geopolitical risk shapes financial fragmentation and international risk-sharing, using bilateral official lending data from 1910 to 2024. We document that when geopolitical risk is high, bilateral lending increasingly follows geopolitical alignment. Because geopolitically aligned countries experience more synchronized shocks, this fragmentation limits the effectiveness of international risk-sharing. To rationalize these patterns, we introduce geopolitical considerations into a limited-commitment model of sovereign borrowing. The model shows that, even with non-discriminatory default, higher geopolitical tensions redirect international lending toward allied countries and weaken risk-sharing. |
| JEL: | F34 G01 H63 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35389 |
| By: | Eichengreen, Barry; Razo-Garcia, Raul |
| Abstract: | In a paper 20 years ago, we analyzed the evolution of the international monetary system over the preceding 20 years and projected its evolution 20 years into the future, on the assumption of unchanged transition probabilities. Here we compare those projections with outcomes and provide new projections, again 20 years into the future. Although the world as a whole has seen financial opening and movement away from intermediate exchange rate regimes, as projected, movement has been slower than projected on the basis of observed transition probabilities in the 20 years preceding our forecast. New projections again based on unchanged transition probabilities but allowing countries to shift between advanced, emerging and developing country groupings and reclassifying exchange rate regimes to accord with current practice again suggest that policy regimes will be modestly different in 2045 than today. There will be a continued decline in intermediate exchange rate arrangements, and gains for hard pegs, as emerging markets move in this direction, and for more freely floating rates, driven by developing countries. There will be a further increase in the share of countries with open capital accounts, driven by emerging markets and developing countries. |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20763 |
| By: | Lewis, Vivien; Puangjit, Sirikorn |
| Abstract: | Geopolitical risk (GPR) shocks that trigger the imposition of sanctions tend to lower output and raise inflation in the sanctioned country. We develop a three-equation small open economy New Keynesian model where GPR shocks are modeled as negative productivity shocks and sanctions manifest as import tariffs in response to GPR increases. We calibrate the GPR process, sanction rule, and interest rate rule to match the observed dynamics of the GPR index, output, inflation, and the policy rate in Russian data. The sanction response to GPR allows the resulting model to capture the empirical impulse responses well. Additionally, we find that Russia's monetary policy rule is more accommodative than prescribed by the standard Taylor rule. While this may reflect policy preferences, recent theoretical results indicate that such a policy stance may be optimal when sanctions act as cost-push shocks that shift the Phillips Curve. |
| Keywords: | geopolitical risk; Monetary policy; New keynesian model; Sanctions |
| JEL: | E31 E32 E58 F42 F51 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20724 |
| By: | Kiyoung Jeon (Department of International Trade, Chungnam National University, Daejeon, Korea); Zeynep Yom (Department of Economics, Villanova School of Business, Villanova University) |
| Abstract: | Sovereign defaults are labor-market disruptions as much as fiscal events, but standard quantitative default models typically impose their costs as exogenous output losses. Using ninety-two default episodes since 1950, we show that output and consumption fall sharply around default while employment falls less, implying a large deterioration in the labor wedge. We develop a quantitative sovereign-default model in which this cost arises endogenously in the labor market: firms pre-finance wages at a rate linked to sovereign spreads, and an efficiency wage prevents the labor market from clearing, so sovereign risk raises hiring costs and unemployment. Calibrated to Argentina, the model matches average unemployment and the unemployment jump at default, and reproduces the comovement of output, unemployment, and spreads. Counterfactuals show that wage rigidity and sovereign-spread pass-through are central to the employment cost of default. They also reveal that debt capacity and default frequency need not move together: changing labor-market transmission mainly changes how much debt the government can sustain. |
| Keywords: | Sovereign default; Unemployment; Efficiency wages; Working capital; Labor market frictions |
| JEL: | E24 E32 F34 F41 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:vil:papers:68 |
| By: | Balatti, Mirco; Kose, M. Ayhan; Mckinnon, Kate Frances; Palombo, Edoardo; Sugawara, Naotaka; Verduzco-Bustos, Guillermo; Vorisek, Dana |
| Abstract: | The first quarter of the twenty-first century has been transformative for emerging market and developing economies (EMDEs). These economies now account for about 45 percent of global GDP, up from about 25 percent in 2000, a trend driven by robust collective growth in the three largest EMDEs—China, India, and Brazil (the EM3). Collectively, EMDEs have contributed about 60 percent of annual global growth since 2000, on average, double the share during the 1990s. Their ascendance was powered by swift global trade and financial integration, especially during the first decade of the century. Interdependence among these economies has also increased markedly. Today, nearly half of goods exports from EMDEs go to other EMDEs, compared to one-quarter in 2000. As cross-border linkages have strengthened, business cycles among EMDEs and between EMDEs and advanced economies have become more synchronized, and a distinct EMDE business cycle has emerged. Cross-border business cycle spillovers from the EM3 to other EMDEs are sizable, at about half of the magnitude of spillovers from the largest advanced economies (the United States, the euro area, and Japan). Yet EMDEs confront a host of headwinds at the turn of the second quarter of the century. Progress implementing structural reforms in many of these economies has stalled. Globally, protectionist measures and geopolitical fragmentation have risen sharply. High debt burdens, demographic shifts, and the rising costs of climate change weigh on economic prospects. A successful policy approach to accelerate growth and development should focus on boosting investment and productivity, navigating a difficult external environment, and enhancing macroeconomic stability. |
| Keywords: | Economic growth |
| JEL: | E32 E60 F02 F44 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20558 |
| By: | Diodato, Dario; Hausmann, Ricardo; Schetter, Ulrich |
| Abstract: | We revisit the well-known fact that richer countries tend to produce a larger variety of goods and analyze economic development through (export) diversifcation. We show that countries are more likely to enter ‘nearby’ industries, i.e., industries that require fewer new occupations. To rationalize this finding, we develop a small open economy (SOE) model of economic development at the extensive industry margin. In our model, industries differ in their input requirements of non-tradeable occupations or tasks. The SOE grows if profit maximizing frms decide to enter new, more advanced industries, which requires training workers in all occupations that are new to the economy. As a consequence, the SOE is more likely to enter nearby industries in line with our motivating fact. We provide indirect evidence in support of our main mechanism and then discuss implications: We show that there may be multiple equilibria along the development path, with some equilibria leading on a pathway to prosperity while others resulting in an income trap, and discuss implications for industrial policy. We finally show that the rise of China has a non-monotonic effect on the growth prospects of other developing countries, and provide suggestive evidence for this theoretical prediction. |
| Keywords: | Industrial policy; Structural change; Poverty trap; Economic complexity; Export diversification; Economic convergence; Product Space |
| JEL: | F43 O11 O14 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20576 |
| By: | Ostry, Daniel; Lloyd, Simon; Corsetti, Giancarlo |
| Abstract: | TThis paper provides econometric evidence on how exchange rates respond to tariffs. We construct a new tariff-shock database, which captures tariff-related announcements, threats and implementations by the U.S., China, the Euro Area and Canada between 2018 and 2020, and in 2025. Our shock measure accounts for both the size of tariff rates and their economic relevance. Over the 2018-2020 period, we show that exchange rates reacted to U.S. tariff shocks in systematically different ways depending on retaliation: the U.S. dollar (USD) appreciated if the tariff was imposed unilaterally, but depreciated if other countries threatened to retaliate. In 2025, when nearly all U.S. tariff actions were met with retaliatory threats, the USD again depreciated. In contrast to 2018-2020, however, long-maturity U.S. Treasury yields rose in 2025, instead of fell—consistent with an interpretation of ‘Liberation Day’ as a reserve-currency shock. This may reflect that U.S. tariff actions in 2025 were significantly larger, more frequent and targeted a broader set of countries. |
| JEL: | F13 F31 F51 G15 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20452 |
| By: | Becko, John; Grossman, Gene M.; Helpman, Elhanan |
| Abstract: | As geopolitical tensions intensify, great powers often turn to trade policy to influence international alignment. We examine the optimal design of tariffs in a world where large countries care not only about economic welfare but also about the political allegiance of smaller states. We consider both a unipolar setting, where a single hegemon uses preferential trade agreements to attract partners, and a bipolar world, where two great powers compete for influence. In both scenarios, we derive optimal tariffs that balance terms-of-trade considerations with strategic incentives to encourage political alignment. We find that when geopolitical concerns are active, the optimal tari¤ exceeds the classic Mill-Bickerdike level. In a bipolar world, optimal tariffs reflect both economic and political rivalry, and may be strategic complements or substitutes. A calibration exercise using U.N. voting patterns, an estimate of the cost of buying votes in the U.N., and military spending suggests that geopolitical motives can significantly amplify protectionist pressures and that the emergence of a second great power can contribute to a retreat from globalization. |
| JEL: | F13 F52 F53 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20571 |
| By: | Giovanni Donato; Emmanouil Kitsios |
| Abstract: | This paper examines the short- and medium-term effects of the 2018–19 China-U.S. tariff increases on the trade and investment flows of ASEAN member economies. Using granular trade data, we demonstrate that several ASEAN countries experienced a disproportionate growth in exports of products that were targeted by these tariffs. To further explore the dynamic and often immediate responses of international capital flows to these trade policy shifts, we leverage a novel firm-level FDI database that allows us to identify surges in sectoral investment inflows. Among ASEAN countries, Vietnam stands out as the one where FDI in targeted sectors grew notably faster during 2018–19, likely contributing to its observed export gains over the medium term. At the same time, our analysis reveals that trade gains in targeted products have not universally translated into stronger overall export performance across ASEAN. More generally, while trade reallocation may yield short- and medium-term gains, these gains can be offset over time by the higher long-term aggregate losses associated with trade fragmentation. |
| Keywords: | ASEAN; Fragmentation; Tariffs; Global Value Chains; Trade; FDI; Difference-in-difference |
| Date: | 2026–06–12 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/118 |
| By: | Charles Nolan |
| Abstract: | The "financial trilemma" asserts that deep financial integration, purely national financial policies and financial stability cannot simultaneously be achieved. Existing formalizations employing ex post burden-sharing games imply the trilemma result hinges on equilibrium selection. We develop a minimal ex ante prudential-effort model where financial integration amplifies cross-border crisis risk and national regulators internalise only part of global losses. The unique symmetric Nash equilibrium underprovides prudential effort and cannot deliver first-best stability when both integration and national policy autonomy are high. That provides a unique-equilibrium foundation for the financial trilemma and clarifies when supranational prudential arrangements are needed. |
| Keywords: | financial trilemma, financial stability, prudential coordination |
| JEL: | F33 G28 H41 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-51 |
| By: | Giuseppe Fiori; Colleen Lipa; Erik Nuenninghoff |
| Abstract: | The current artificial intelligence (AI) investment boom in the United States provides a powerful boost to imports of high-technology capital goods. The AI buildout bears the hallmarks of an investment-specific technology shock—a process in which rapid technological progress makes each new generation of capital equipment significantly cheaper and more powerful than the last, but where reaping those efficiency gains requires continuous and substantial investment to acquire and deploy the new vintage of capital goods. |
| Date: | 2026–07–14 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:103554 |
| By: | David Borner; Heiko Sorg |
| Abstract: | The general search for US dollars in forward currency markets, combined with the balance-sheet constraints of intermediary dealers, induces persistent failure of covered interest parity (CIP). We investigate these CIP deviations across the entire maturity spectrum by analyzing the daily dynamics of the USD/CHF cross-currency basis curve. Applying functional principal component analysis, we identify three components that explain virtually all curve dynamics: a persistent, slow-moving level component, a temporary steepener, and a short-end component inducing sharp basis widenings and contractions around quarter-end dates. We provide empirical evidence that CIP-implied carry opportunities and US monetary policy announcements widen the entire basis curve, whereas Fed swap line announcements tend to narrow it. During periods of global turmoil, the slope inverts in response to rising credit and capital stress among dealer banks, while funding stress steepens the curve as swap line usage mitigates short-end distortions. Reporting date effects, funding stress, and deteriorating market liquidity widen the basis primarily at the short- end. We further show that regulatory reporting dates generate systematic window-dressing distortions not only at the short end but also in the slope of the basis curve. This effect has weakened since 2022, which is consistent with recent changes in the regulatory landscape. |
| Keywords: | Covered interest parity, FX swaps, Cross-currency basis, Limits to arbitrage, US dollar funding |
| JEL: | F31 G15 G2 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:snb:snbwpa:2026-09 |
| By: | Alice Albonico; Guido Ascari; Qazi Haque; Kostas Mavromatis; Andra Smadu |
| Abstract: | We develop and estimate an open economy DSGE model for the euro area where global energy prices and the exchange rate jointly determine domestic inflation, because imported energy, priced in foreign currency, enters both consumption and production. Energy and exchange-rate disturbances account for the bulk of short-run volatility in headline euro area inflation, with energy price shocks driving most of the post-pandemic surge. Because energy and non-energy goods are poor substitutes, an adverse energy price shock raises import values, deteriorating the trade balance and depreciating the real exchange rate through the net-foreign-asset and UIP channels. The exchange-rate channel strengthens monetary transmission and improves the short-run inflation-output trade-off relative to a non-energy economy. Optimal policy can exploit this channel rather than looking through energy price shocks. The case for looking through such shocks becomes stronger when the central bank assigns a greater weight to output gap stabilization and prices become stickier. |
| Keywords: | monetary policy, inflation, energy, Bayesian estimation |
| JEL: | E52 E31 E32 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-55 |
| By: | Corsetti, Giancarlo; Lloyd, Simon; Marin, Emile; Ostry, Daniel |
| Abstract: | We document a rise in investors’ assessment of U.S. risk relative to other G.7 economies since the late 1990s, driven by higher permanent risk but not reflected in currency returns. Using a two-country framework with trade in a rich maturity structure of bonds which earn convenience yields, alongside risky assets and currencies, we establish an equilibrium relationship between cross-border convenience yields, relative country risk and carry-trade returns. Empirically, we identify a cointegrating relationship between relative permanent risk and long-maturity convenience yields. Counterfactual experiments show rising relative permanent risk explains around one-third of declining long-maturity convenience yields over 2002-2006 and 2010-2014. |
| Keywords: | Equity risk premium |
| JEL: | F30 F31 G12 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20657 |
| By: | Sai Ma; Viktors Stebunovs; Judit Temesvary |
| Abstract: | We develop a Transmission Growth-at-Risk (TGaR) framework that incorporates foreign financial vulnerabilities as predictors of U.S. downside growth risk. We distinguish financial conditions, which measure current tightness in credit markets, from financial vulnerabilities, which measure structural fragilities that can amplify shocks. Elevated foreign financial vulnerabilities are associated with lower U.S. growth-at-risk, with transmission through both trade linkages and dollar integration channels. Asset valuation pressures and financial sector leverage abroad have the largest estimated amplification effects. Financial conditions primarily affect near-term tail risk, while foreign vulnerabilities weigh on U.S. GDP at a medium-term horizon. Out of sample, adding foreign vulnerabilities raises the predictive score by 53 percent at the 8-quarter horizon. Crisis-episode evidence points to the same interpretation. These findings show that monitoring foreign financial vulnerabilities is important for gauging U.S. growth prospects. |
| Keywords: | growth-at-risk; financial vulnerabilities; international transmission; risk assessment |
| Date: | 2026–07–17 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:103562 |
| By: | Bernstein, Martin; Meyer, Josefin; O'Rourke, Kevin; Schularick, Moritz |
| Abstract: | Do trade dependencies leave countries vulnerable to geopolitical coercion? We study the economic costs of trade and financial sanctions, from 1920 to the present. We first develop a continuous measure of sanction intensity, using bilateral commodity-level data to calculate the importance of specific flows that fall under sanctions. We find that sanctions inflict relatively small costs on average: sanctioning 1% of GDP worth of imports or exports leads to approximately 0.3 percentage points of lost GDP over a 5-year period and a 0.1 percentage point increase in unemployment. However, we show that sanctions are far more costly for countries whose trade is highly concentrated, and for countries that rely heavily on exporting primary commodities. Low income and developing countries appear most vulnerable to trade sanctions, while high income financial centers and some EU countries are among the most exposed to financial sanctions. |
| Keywords: | Financial sanctions; Economic coercion |
| JEL: | F14 F51 F41 F13 H56 D74 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20457 |
| By: | Bayer, Christian; Kriwoluzky, Alexander; Müller, Gernot; Seyrich, Fabian |
| Abstract: | Attitudes toward fiscal policy differ: "fiscal conservatism" and "fiscal liberalism" vary in their willingness to tolerate budget deficits. We challenge the view that such attitudes reflect national preferences. Instead, we offer an economic explanation based on a two-country Heterogeneous Agent New Keynesian model, bringing its implicit political economy dimension to the forefront. We compute the welfare implications of alternative fiscal policies at the household level to assess the conditions under which a policy commands majority support. Whether the majority supports fiscal conservatism or liberalism depends on a country’s debt level, its wealth distribution, and the nature of the economic shock. |
| Keywords: | Two-country model; Government debt |
| JEL: | E32 H63 F45 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20473 |
| By: | Baslandze, Salomé; Fuchs, Simon |
| Abstract: | We study the role of supply chain disruptions in shaping consumer prices, focusing on both firms’ own import shocks and strategic responses to competitors’ disruptions. Using a newly constructed microlevel dataset that links transaction-level U.S. import data from Bills of Lading with high-frequency consumer prices and sales from a consumer panel, we develop a novel approach to estimate the price effects of cost shocks and product availability. Motivated by a model of delivery delays, cost shocks, and firm pricing, we implement a shift-share identification strategy based on delivery shortfalls, port congestion, and freight and import costs. We find sizable pass-through elasticities: firms raise prices in response to higher import costs and delivery delays, especially when disruptions persist. We also identify strategic pricing: firms—including non-importers—increase prices in response to competitors’ supply chain disruptions. Using our estimates and back-of-the-envelope calculations from the model, we show that strategic interactions significantly amplified the direct effects of supply chain shocks on consumer prices during the pandemic. |
| Keywords: | Supply chains; Inflation; Strategic interactions; Pass-through; Inventory |
| JEL: | E31 F14 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20589 |
| By: | Bertaut, Carol; Faia, Ester; Kalemli-Ozcan, Sebnem; Marchesini, Camilo; Paetzold, Simon; Schmitz, Martin |
| Abstract: | We use administrative security-level data from the U.S. and Euro Area (EA) portfolios to estimate asset demand and supply elasticities by exploiting exogenous variation in bond-specific currency wedges. Employing a Bartik-style shift-share identification approach, we document extensive heterogeneity in investor demand responsiveness to exogenous changes in the price of currency risk, conditional on the issuer characteristics. Demand for AE-bonds is always inelastic, whereas for EM-bonds, elasticity depends on investor type and currency: insurance/pension, nonbanks and banks have finite-elastic demand for EM-bonds that are issued in their own (investor) currency. For EM-issuer-currency bonds, only EA non-bank investors increase the share of these bonds in their portfolio when currency wedges widen, suggesting they accept higher currency risk for higher returns. In response, issuers adjust their supply endogenously: an exogenous increase of 8 basis point in currency wedges leads to a 0.26% decline in local currency bond issuance relative to GDP. We develop a theoretical framework where debt issuance decisions take into account heterogenous demand of investors in terms of their response to changes in the price of currency risk. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20665 |
| By: | Manger, Mark; Mihalyi, David; Panizza, Ugo; Rescia, Niccolò; Trebesch, Christoph; Wong, Ka Lok |
| Abstract: | This paper introduces the African Debt Database (ADD) - a new, comprehensive dataset that traces both domestic and external debt instruments at a granular level. The main innovation is a detailed mapping of Africa’s domestic debt markets, drawing on rich, new data extracted from government auction reports and bond prospectuses. The database covers over 50, 000 individual government loans and securities issued by 54 African countries between 2000 and 2024, amounting to a total of USD 6.3 trillion in debt. For each instrument, it provides harmonized micro-level information on currency, maturity, interest rates, instrument type, and creditor. The data reveal the growing dominance of domestic debt in Africa — albeit with substantial cross-country variation. Four stylized facts stand out: (i) the rapid expansion of domestic debt markets, especially in middle-income countries; (ii) the wide dispersion in borrowing costs and real interest rates; (iii) large cross-country differences in maturity structures and associated rollover risks; and (iv) a rising debt-service burden, particularly due to international bonds. Generally, this project shows that debt transparency is both feasible and valuable, even in data-scarce environments. |
| Keywords: | Africa |
| JEL: | F34 H63 O55 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20747 |
| By: | Goldberg, Pinelopi Koujianou; Ruta, Michele |
| Abstract: | This paper revisits the relationship between international trade, trade policy, and development in light of the structural, policy, and geopolitical shifts that have transformed globalization over the past decade. While trade has historically supported development through both static and dynamic channels, we argue that the latter—those inducing structural transformation and institutional change—have been far more consequential for long-run development. Through access to global markets, participation in global value chains, and knowledge and technology transfers, and by providing an anchor for reform, trade and trade agreements have contributed to productivity gains, technological progress, quality and skill upgrading, and institutional change in many low- and middle-income countries. Yet, the conditions that enabled these effects—technologically driven declines in transportation and communication costs, fragmentation of the production process, liberal trade regimes, multilateralism and geopolitical stability—are changing. Automation, digitization, climate change, the return of industrial policy in advanced economies, and the rise of geopolitical rivalry are reshaping the global trade environment. In this new context, the scope for replicating past export-led growth successes is unlikely as two key growth mechanisms, access to the lucrative markets of advanced economies and knowledge sharing, are under threat. We discuss whether trade in services or the green transition could provide alternative paths and emphasize that future development prospects will increasingly depend on the policy choices of large economies and the ability of developing countries to adapt to a more fragmented global system. |
| Keywords: | Globalization; Development; Trade policy; Multilateralism |
| JEL: | F1 O1 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20648 |
| By: | Yassine kirat (Laboratoier d'Economie d'Orleans (LEO) & Labex VOLTAIRE) |
| Abstract: | This paper analyzes the impacts of both natural-resource abundance and natural-resource volatility on economic growth. We apply the panel smooth transition regression (PSTR) approach of Gonzales et al. (2005), which is more flexible than the standard fixed-effects model, to data on 87 countries over the 1989-2015 period. Our results suggest that: (i) greater natural-resource abundance significantly raises economic growth, contrary to the resource-curse paradox; (ii) the impact of natural-resource abundance, investment and human capital on GDP growth rate per capita is non-linear, and varies by the level of natural-resource abundance volatility; and (iii) the subsequent GDP growth loss may reach 17 percentage points per year for countries with the highest natural-resource abundance volatility, compared to those with the lowest natural-resource abundance volatility. Volatility in natural-resource revenues and poor governmental responses then seem to drive the resource-curse paradox, instead of natural-resource abundance as such. |
| Keywords: | Growth, resource curse, natural resources volatility, PSTR, , , , |
| JEL: | C23 F43 Q32 O13 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:fae:wpaper:2024.07 |
| By: | António Afonso; José Alves; Periklis Gogas; Theophilos Papadimitriou |
| Abstract: | Using annual EU-27 data for 1995-2024, we examine whether sovereign ratings mainly reflect common macro-fiscal fundamentals or whether agency-specific departures from that benchmark are also priced into sovereign funding conditions. Pooled ordered probits and a machine-learning diagnostic layer for nonlinearities and thresholds for Fitch, Moody’s, and S&P identify a stable set of core rating determinants centred on inflation, debt-to-GDP, current account balance, budget balance rule indicator, output gap, old-age dependency, and revenue capacity, while within-country variation is narrower and concentrated mainly in inflation, debt, and unemployment. The machine-learning analysis confirms that flexible models absorb nearly all systematic variation between fundamentals and ratings, validating the shadow-rating decomposition used in the market-pricing test. ECB-based bond-yield regressions show that both the fundamentals-implied shadow rating and the agency-specific deviation are priced in euro-area Bund spreads: a one-notch more favourable value of either component is associated with about 50 basis points lower spreads. Evidence indicates that this pricing effect strengthens as debt rises and intensifies further once debt exceeds 100% of GDP, while a shorter crisis-period interaction is directionally similar but less precise. Sovereign ratings therefore appear to combine a common fundamentals core with discretionary overlays that markets treat as economically relevant signals. |
| Keywords: | sovereign ratings, sovereign risk pricing, sovereign bond spreads, rating agencies, ordered probit, panel data, machine-learning, macro-financial transmission |
| JEL: | C23 C25 E44 F34 G15 H63 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12832 |
| By: | Davide Del Prete; Aminur Rahman; Edoardo Tolva |
| Abstract: | This paper examines how transport mode shapes the geography of exchange rate pass-through (ERPT) within Global Value Chains. Using transaction-level customs data from the Bangladeshi garment sector (2018–2024), we exploit the sharp depreciation of the Bangladeshi Taka in 2022 to compare maritime and air-based trade corridors through Chittagong seaport and Dhaka airport. We show that ERPT to exporter prices is incomplete on average and systematically lower in buyer–seller relationships that rely more intensively on air transport. This differential is concentrated in destinations and products where delivery speed is especially valuable, notably European fast-fashion markets. |
| Keywords: | global value chains, exchange rate pass-through, transport mode, Bangladesh |
| JEL: | D22 D43 E31 L14 L22 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12834 |
| By: | Budnik, Katarzyna |
| Abstract: | This paper studies how temporary migration affects macroeconomic fluctuations and the conduct of stabilisation policies using a two-country DSGE model with search-and-matching frictions and endogenous cross-border labour mobility. The analysis shows that migration responds endogenously to both labour market conditions and exchange rate movements, making it an important channel of cross-country adjustment. Labour mobility alters the transmission of shocks in three main ways. First, it redistributes adjustment to productivity shocks across regions, smoothing output fluctuations in receiving economies while producing more nuanced effects in sending economies. Second, it favorably affects policy trade-offs: migration reduces the output costs of monetary tightening, and it mitigates the crowdingout effects of fiscal expansions. Third, it strengthens cross-country spillovers by transmitting labour market shocks across regions and reshaping their domestic propagation. Overall, temporary migration emerges as a powerful but non-neutral adjustment mechanism that affects both the effectiveness of stabilization policies and the distribution of macroeconomic outcomes across integrated economies. JEL Classification: E20, E32, F16, F22, F41 |
| Keywords: | business cycle, dynamic stochastic general equilibrium model, EU enlargement, integration, labour market, migration |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263251 |
| By: | Aldasoro, Inaki; Hördahl, Peter; Schrimpf, Andreas; Zhu, Sonya |
| Abstract: | Using newly constructed market conditions indicators (MCIs) for three pivotal markets centered around the US dollar (Treasury, foreign exchange, and money markets), we demonstrate that tree-based machine learning (ML) models significantly outperform traditional time-series approaches in predicting the full distribution of future market stress. Through quantile regressions, we show that the random forest method achieves up to 27\% lower quantile loss than autoregressive benchmarks, particularly at longer horizons (up to 12 months). Shapley value analysis reveals that variables related to macro expectations and uncertainty — especially about the monetary policy stance — are important predictors of future tail realizations of market conditions. For individual market segments, the state of the global financial cycle, as well as liquidity conditions, also play important roles. These results highlight the value of ML in forecasting tail risks and identifying systemic vulnerabilities in real time, bridging the gap between high-frequency data and macroeconomic stability frameworks. |
| Keywords: | Shapley value |
| JEL: | G01 C53 G17 G12 G28 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20439 |
| By: | Gonon, Morgane; Godin, Antoine; Daumas, Louis; Althouse, Jeffrey; Svartzman, Romain |
| Abstract: | More comprehensive debt solutions are needed to leverage liabilities for environmental protection. Despite growing interest in integrated debt–environment solutions, the existing literature overlooks the macro-financial linkages that shape sovereign risk, capital flows, and fiscal space. To fill this gap, this paper explores the intersection of sovereign debt relief, green investment, and macro-financial stability by modeling green debt instruments at the macroeconomic scale and assessing their robustness under uncertainty. Using Colombia as a case study, we adapt the GEMMES macroeconomic framework—a dynamic Stock-Flow Consistent model—to simulate various debt management strategies under a multi-objective robust decision-making approach. We identify robust Pareto-optimal combinations of four debt relief levers : (1) greenium (concessional borrowing), (2) foreign investment in local currency-denominated bonds, (3) interest renegotiation and (4) principal adjustment, i.e. combinations that balance public investment, inflation control, and external stability to support Colombia's climate and biodiversity investment. Two types of Pareto-optimal strategies emerge: (1) a controlled approach aimed at reducing foreign debt-related vulnerabilities, and (2) a more ambitious strategy involving the swap of old debt for new, highly subsidized loans. While debt relief can temporarily ease trade imbalances, lasting macroeconomic stability requires structural changes in production and exports. This research contributes to the ongoing research stream on the international financial architecture and green transition support by, first, bridging post-1990s macroeconomic analyses of debt relief with contemporary sustainable development challenges, and second, highlighting the importance of integrating macroeconomic resilience into the development finance literature. |
| Keywords: | Sovereign debt; Debt relief; Balance sheets |
| JEL: | F34 F36 F55 Q56 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20443 |
| By: | Forbes, Kristin; Ha, Jongrim; Kose, M. Ayhan |
| Abstract: | Central banks often face tradeoffs in how their monetary policy decisions impact economic activity (including employment), inflation and the price level. This paper assesses how these tradeoffs have evolved over time and varied across countries, with a focus on understanding the post-pandemic adjustment. To make these comparisons, we compile a cross-country, historical database of “rate cycles†(i.e., easing and tightening phases for monetary policy) for 24 advanced economies from 1970 through 2024. This allows us to quantify the characteristics of interest rate adjustments and corresponding macroeconomic outcomes and tradeoffs. We also calculate Sacrifice Ratios (output losses per inflation reduction) and document a historically low “sacrifice†during the post-pandemic tightening. This popular measure, however, ignores adjustments in the price level—which increased by more after the pandemic than over the past four decades. A series of regressions and simulations suggest monetary policy (and particularly the timing and aggressiveness of rate hikes) play a meaningful role in explaining these tradeoffs and how adjustments occur during tightening phases. Central bank credibility is the one measure we assess that corresponds to only positive outcomes and no difficult tradeoffs. |
| Keywords: | Monetary policy; Interest rates; Central bank; Business fluctuations; Prices; Employment |
| JEL: | E31 E32 E43 E52 E58 F33 F44 N10 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20240 |
| By: | Alvarez, Jorge; Benatiya Andaloussi, Mehdi; Maggi, Chiara; Sollaci, Alexandre; Stuermer, Martin; Topalova, Petia |
| Abstract: | This paper studies the economic impact of commodity trade fragmentation. Using a novel production and trade dataset of 48 key commodities, we develop a partial equilibrium framework to identify the most vulnerable commodities to trade disruptions and assess the ensuing economic risks. Trade fragmentation can cause large price changes for many commodities, with minerals critical for the clean energy transition and selected agricultural commodities being the most vulnerable. The economic relevance of commodity trade fragmentation, measured by changes in consumer and producer surplus, varies across countries. However, offsetting effects across commodity exporting and importing countries, imply modest global surplus losses. |
| Keywords: | Commodities |
| JEL: | F11 F12 F14 F15 F17 F41 F42 F43 Q17 Q27 Q37 Q43 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20451 |
| By: | Benny Kleinman; Ernest Liu; Stephen J. Redding; David Xu |
| Abstract: | We develop a tractable quantitative model of international trade in which agents make bilateral investments in resilience under general equilibrium uncertainty. Under both complete and incomplete financial markets, we show that these bilateral investments solve a portfolio problem of choosing trade partners. Countries' risk profiles become determinants of trade flows, income and welfare, whose first moments are affected by the second moments of productivity and trade costs. Changes in global economic uncertainty have heterogeneous effects across countries, depending on how they affect real hedging opportunities. The opening of trade can raise or reduce income volatility, but is revealed-preferred to autarky. |
| Keywords: | uncertainty, resilience, trade, welfare |
| Date: | 2026–06–30 |
| URL: | https://d.repec.org/n?u=RePEc:cep:cepdps:dp2196 |
| By: | Bonadio, Barthelemy; Huo, Zhen; Kang, Elliot; Levchenko, Andrei; Pandalai-Nayar, Nitya; Toma, Hiroshi; Topalova, Petia |
| Abstract: | We adopt a data-driven approach to measure trade fragmentation over the period 2015-2023. Countries are classified into three groups according to changes in their trade costs with the US and China: those shifting toward the US bloc, those shifting toward the China bloc, and those with no change in alignment. Roughly one-quarter of countries moved toward each bloc, while about half showed no realignment. We document that while cross-bloc trade costs rose, they were accompanied by falling within-bloc trade costs. We use a quantitative model to compute the real income effects of this reconfiguration of the global trade costs. The median country in the world, and the median country within each bloc, has 0.4-0.6% higher real income as a result of the observed decoupling, contrary to the widespread belief that fragmentation has been welfare-reducing. Finally, we find a modest amount of bloc misalignment: the median country moving to the US bloc would actually be better off moving to the China bloc, and vice versa. These results suggest that trade decoupling does not always follow trade-driven economic interests. |
| JEL: | F41 F44 F62 L16 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20664 |
| By: | Mavus Kutuk, Merve; van Wijnbergen, Sweder |
| Abstract: | This paper examines the role of currency crash risk in explaining the persistent profitability of carry trades. Focusing on the US Dollar–Turkish Lira market, we construct three forward-looking measures of crash risk: risk reversals, crash probabilities from option-implied distributions, and jump risk from a jump-diffusion model. Using survey-based exchange rate expectations, we separate ex ante carry premia from ex post surprises. Our results show that higher crash risk significantly increases expected returns, indicating that investors demand compensation for bearing such risk rather than arbitraging away mispricing. Shapley decomposition attributes over 20\% of the explained variance in expected carry returns to crash risk, while balance sheet constraints and global risk aversion further reinforce premia. A comparison of hedged and unhedged strategies reveals that 46–77\% of carry returns reflect compensation for crash exposure. |
| Keywords: | Exchange rates |
| JEL: | F13 G01 G10 G12 G15 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20745 |
| By: | Gelpern, Anna; Haddad, Omar; Horn, Sebastian; Kintzinger, Paulina; Parks, Brad; Trebesch, Christoph |
| Abstract: | This paper is the first comprehensive analysis of the secured lending practices of Chinese creditors in emerging market and developing economies (EMDEs). We present a new dataset and detailed case studies of their collateralized public and publicly guaranteed (PPG) loans in EMDEs between 2000 and 2021. Almost half of China's total PPG loan portfolio to EMDEs is effectively collateralized - amounting to $420 billion in collateralized debt across 57 countries. We document that Chinese lenders build multi-layered legal safety nets around risky EMDE loans, adapting techniques from export and project finance. They rarely take infrastructure project assets as collateral, but rely on liquid, easily accessible assets, such as cash in bank accounts in China, funded from established commodity revenue streams unrelated to the project. These commodity revenues are routed overseas as security - out of public sight and largely beyond the borrower’s reach. Our findings raise new concerns about debt transparency, fiscal autonomy, and macroeconomic surveillance, particularly in commodity-exporting EMDEs. |
| Keywords: | China; lending |
| JEL: | F34 G15 H63 H81 K12 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20379 |
| By: | Reuter, Marco; Agur, Itai; Copestake, Alexander; Martínez Pería, Maria Soledad; Teoh, Ken |
| Abstract: | Cross-border payments are changing: existing intermediaries are upgrading their networks and new platforms based on novel digital forms of money are being explored, even as geoeconomic fragmentation is introducing new frictions. We develop a stylized model to assess the potential implications for the level and volatility of capital flows and exchange rates. On levels, we find that lower frictions in cross-border payments reduce UIP deviations and increase capital flows. On volatility, we find that the impact of lower frictions depends on the type of shock and the degree to which frictions decline. For real shocks, lower frictions increase capital flow volatility and reduce exchange rate volatility. For financial shocks, lower frictions increase exchange rate volatility while the impact on capital flow volatility is ambiguous. Specifically, when frictions decline by a small amount, capital flow volatility increases, while the opposite holds when the reduction in frictions is large. An increase in frictions reverses these results. |
| JEL: | E42 F31 F32 G15 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20722 |
| By: | Carmen L Avila-Yiptong; Georges Hatcherian; Mahamoud Islam |
| Abstract: | This paper shows that sovereign bond spreads are shaped not only by absolute debt levels but also by a country’s relative debt position within its peer group. Using panel fixed effects for over 80 emerging and developing economies over 1993-2024, we find that relative debt—especially benchmarked by income and commodity status—has greater explanatory power for spreads than gross debt alone. A one–standard deviation increase in relative debt raises spreads by roughly 0.2–0.3 standard deviations, comparable in magnitude to global risk indicators. Similarly, a 10 percent increase in relative debt is associated with a 3.8 percent increase in sovereign spreads, all else equal. The effect of relative debt is state-dependent, being stronger in countries with better institutions, access to concessional lending, and during periods of low risk aversion and ample global liquidity. These results hold across alternative specifications, sample periods, methodologies, and controls, which underscores the comparative nature of investor assessments and the importance of benchmarking for fiscal policy, debt management, and international surveillance. |
| Keywords: | Sovereign spreads; emerging markets; debt; relative debt; peer benchmarking; investor risk perception; sovereign risk pricing |
| Date: | 2026–06–05 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/110 |
| By: | Rey, Hélène; Stavrakeva, Vania |
| Abstract: | We study the anatomy of the international portfolio finance network. As global financial linkages have become denser over time, cross-border portfolio equity positions have grown in importance relative to debt for Emerging markets and Advanced economies. Using the framework developed by Stavrakeva and Rey (2024), we construct a novel proxy of daily foreign investor holdings in both equity and long-term sovereign debt markets across 32 currency areas. Leveraging an instrumental variable strategy, we identify an effect of foreign equity ETF inflows on exchange rates and local stock market prices. Our high-frequency proxy enables us to interpret episodes of turbulence in international finance. It should prove useful to assess how persistent the current shocks to the international financial system are likely to be. |
| JEL: | F30 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20799 |
| By: | Li, Junye; Sarno, Lucio; Zinna, Gabriele |
| Abstract: | Using model-free skewness measures that exploit the asymmetry in semivariances and option data from the over-the-counter currency market, we find that buying currencies with a high skewness risk premium (SRP) and selling currencies with a low SRP generates high returns and Sharpe ratio. Asset pricing tests – which control for omitted variables and measurement errors – show that a SRP factor enters the currency pricing kernel and is central to the pricing of risks inherent in a broad currency cross-section of 60 portfolio excess returns. These results imply that skewness risk is a strong and priced source of currency risk. |
| JEL: | F31 G12 G15 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20587 |
| By: | Fernando Garcia; Ricardo Hausmann (Harvard's Growth Lab) |
| Abstract: | This paper asks whether the World Bank can change the denomination of its lending without weakening its own financial position. Using monthly CPI and exchange-rate data, we construct the dollar returns the Bank would earn on loans indexed to borrowers’ domestic inflation and aggregate those returns using current IBRD and IDA portfolio weights. Country returns are volatile. Portfolio returns are much calmer because cross-country correlations are low. The diversification dividend is large enough to make the financially indifferent coupon on a CPI-indexed instrument close to, and in some cases below, current lending rates. The World Bank can reduce one of the core sources of macroeconomic instability in borrowing countries at little or no financial cost to itself. |
| Keywords: | Inclusive Growth |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:glh:wpfacu:271 |
| By: | Arteaga-Garavito, María José; Colacito, Ric; Croce, Mariano; Yang, Biao |
| Abstract: | We develop novel high-frequency indices that measure climate attention across a wide range of developed and emerging economies. By analyzing the text of over 23 million Tweets published by leading national newspapers, we find that a country experiencing more severe climate news shocks tends to see both an inflow of capital and an appreciation of its currency. In addition, brown stocks experience large and persistent negative returns after a global climate news shock if located in highly exposed countries. A risk-sharing model in which investors price climate news shocks and trade consumption and investment goods in global markets rationalizes these findings. |
| Keywords: | Trade; Currencies |
| JEL: | F3 F4 G1 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20607 |
| By: | Imam, Patrick; Temple, Jonathan |
| Abstract: | During a major crisis, the transitional dynamics of conditional convergence are unlikely to apply. In this paper, we introduce a Markov chain approach which integrates the study of crises and convergence. We allow upwards and downwards mobility to change when a country enters a crisis regime. We find that conflict and debt crises help to explain the persistence of low relative income, and that the convergence process has changed over time. Faster global convergence in the early 2000s can be attributed partly to fewer and shorter crises, so the multiple shocks since the late 2010s are likely to have slowed income convergence. |
| Keywords: | Convergence |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20733 |
| By: | Stavrakeva, Vania; Tang, Jenny |
| Abstract: | In this paper, we build a general equilibrium model that takes the institutional details of the foreign exchange market into account and allows for deviations from full information rational expectations (FIRE) in a way consistent with forecast survey data and traders’ asset positions. We show that the testable implications of this model — related to foreign exchange derivatives positions, and both realized and expected exchange rates — are strongly supported in the data. Moreover, we argue that the particular form of deviation from FIRE implied by the data can help resolve important exchange rate puzzles, such as the Fama puzzle and the delayed overshooting puzzle, and can generate hump-shaped dynamics of exchange rates. |
| Keywords: | Survey forecasts; Exchange rate dynamics; Belief formation |
| JEL: | E52 F31 G01 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20321 |
| By: | Allen, Cian; Bems, Rudolfs; Boer, Lukas; Moussa, Racha |
| Abstract: | US dollar appreciations can inflict sizable negative cross-border spillovers. We investigate such spillovers from flight-to-safety shocks and the accompanying “global dollar cycle†. Our results show that negative real sector spillovers from US dollar appreciations fall disproportionately on emerging markets. In contrast, effects on advanced economies are small and short-lived. Emerging market commodity exporters historically experienced larger negative spillovers than commodity importers, reflecting a strong negative link between the US dollar and commodity prices. In terms of policies, more anchored inflation expectations can mitigate the initial negative spillovers, while more flexible exchange rates can speed up the subsequent economic recovery. |
| JEL: | E50 F30 F41 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20371 |
| By: | Zhou, Sili; Ma, Chang; Rebucci, Alessandro |
| Abstract: | Chinese private portfolio equity outflows, though small compared to other Chinese outflows, are growing rapidly because of capital account liberalization and capital flight. Using granular stock-holding data on Qualified Domestic Institutional Investor (QDII) mutual funds, we identify a nascent financial channel of international transmission of Chinese monetary policy to world stocks. Event study analysis around monetary policy announcement days reveals that monetary policy tightening depresses returns of country equity indexes and individual U.S. stocks with QDII fund exposure relative to non-exposed stocks. The results are robust to controlling for the real transmission channel of Chinese monetary policy and other confounders. The effect is driven by smaller and less liquid firms, but not by China-concept stocks or those highly exposed to China's macroeconomic shocks. We also find that the results are driven by household portfolio rebalancing from more to less risky assets following the announcement. |
| JEL: | F30 G10 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20672 |
| By: | Pappadà , Francesco; Zylberberg, Yanos |
| Abstract: | This paper examines how the dynamics of informality affects optimal fiscal policy and default risk. We build a model of sovereign debt with limited commitment and informality to assess the consequences of dynamic distortions induced by fiscal policy. In the model, fiscal policy has a persistent impact on taxable activity, which affects future fiscal revenues and thus default risk. The interaction of tax distortions and limited commitment strongly constrains the dynamics of optimal fiscal policy and leads to (i) more frequent default episodes and (ii) costly fluctuations in consumption. |
| JEL: | E26 E62 F34 F41 H20 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20604 |
| By: | Mayer, Thierry; Mejean, Isabelle; Thoenig, Mathias |
| Abstract: | We develop a model of international trade and geopolitical disputes, embedding a diplomatic game of escalation to conflict within a quantitative model of trade. Bilateral disputes arise exogenously, and rival countries engage in negotiations to avoid war. In equilibrium, all welfare-relevant geoeconomic factors — such as the realized costs of war, the concessions required to avert it, and the probability of deescalation — depend on the opportunity cost of war, itself shaped by observed trade flows. We provide a simple procedure to estimate these factors in a model of trade calibrated to current data. This approach is then used to quantify the geoeconomic factors characterizing the US-China relationship, both historically and under prospective "decoupling" scenarios. We find that the growing U.S. dependence to Chinese products over the past thirty years has increased the cost of geopolitical disputes with China for the US. In this context, decoupling from China through increased tariffs may offer geopolitical benefits. Yet, the analysis highlights a fundamental security dilemma: because trade dependencies influence bargaining power in negotiations, decoupling reduces the diplomatic concessions needed to maintain peace but can paradoxically raise the risk of escalation by weakening incentives for restraint. Overall, this quantitative framework offers a structured tool to guide policy decisions on the optimal degree of decoupling. |
| Keywords: | International trade |
| JEL: | F1 F5 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20564 |
| By: | Anne Michels; Valeria Ferreira; Paola Annoni; Julien Burton; Luis Pedauga; José Manuel Rueda Cantuche; Maja Kušen; Gábor Kátay |
| Abstract: | Accelerating the digital transition is a central pillar of the Recovery and Resilience Facility (RRF), the EU’s postCOVID recovery instrument for 2020-2026. Based on November 2025 data, EU member states allocated EUR 148.8 billion (approximatively 0.8% of the EU’s annual GDP) across 676 measures to support the digital transition. This represents around 23% of total RRF funding, surpassing the 20% minimum mandate. This study examines the scope and significance of digital RRF reforms and investments and estimates the economic impact of digital RRF investments. Digital RRF investments are estimated to generate positive effects across all sectors of the economy, through increased demand for final goods, supply-chain linkages, and productivity gains. Simulations using the FIDELIO macroeconomic model show that by 2030, ten years after the launch of the Facility, the cumulative global macroeconomic impact will amount to EUR 302.3 billion, corresponding to a multiplier of around 2, driven by strong productivity effects of investments in high-tech sectors. The study also compares country experiences. Focusing on digital RRF investments, Italy is the largest beneficiary, with estimated impacts significantly exceeding its initial allocation. Other highly integrated economies, including Germany, France, Denmark, Finland, Sweden, Ireland, Luxembourg, Austria, Belgium, and the Netherlands, are estimated to experience economic gains ranging from two to over six times their direct allocations driven by positive cross-border spillovers arising from RRF spending in other Member States. This highlights the role of the Single Market in amplifying the effects of national investments funded by the RRF. |
| JEL: | C82 E61 E62 F15 F17 F41 F42 F62 O33 O38 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:euf:dispap:249 |
| By: | Kalina Manova; Dennis Novy; Thomas Sampson; Aaron Tang |
| Abstract: | US trade policy in 2025 was unprecedented in the frequency, complexity and volatility of tariff announcements. This paper presents evidence that the resulting policy environment reduced trade flows because of confusion over current tariff levels. We build a new US Tariff Announcement Database for 2025 from US presidential executive orders and proclamations. For each origin country, product and month, we calculate US statutory tariffs and propose novel indicators of tariff confusion: the number of relevant announcements, the number of possible tariff calculations arising, and bounds on possible tariff miscalculation. We show that both tariff increases and tariff confusion reduced US imports during 2025, with confusion more than doubling the impact of tariffs. Moreover, tariff confusion was (i) persistent, and more damaging at higher tariff levels; (ii) mediated through lower import quantities, with little effect on import prices; and (iii) less detrimental for relationship-specific goods and origin countries with stronger trust in foreigners. Our results highlight previously unexplored consequences of the manner in which trade policy changes are implemented. |
| Keywords: | confusion, tariffs, trade policy uncertainty, trade war |
| Date: | 2026–06–30 |
| URL: | https://d.repec.org/n?u=RePEc:cep:cepdps:dp2195 |
| By: | Benhima, Kenza; Blengini, Isabella; Merrouche, Ouarda |
| Abstract: | This paper highlights the disagreement channel of corporate foreign currency (FC) borrowing. In our model, if domestic agents have better information than foreign lenders on the state of the economy, FC borrowing might arise if the fundamentals are strong relative to what public signals suggest to foreigners. In these situations, international markets overestimate future currency depreciation, which increases the cost of borrowing in domestic currency. Domestic agents then borrow more in FC because they disagree with international lenders' pessimistic assessment. This mechanism is consistent with the data: empirically, we show that, controlling for fundamentals, negative public signals are associated with positive domestic currency excess returns and with more FC borrowing. |
| Keywords: | Expectations |
| JEL: | G15 F34 D83 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20580 |
| By: | Castillo-Martinez, Laura |
| Abstract: | Following a sudden stop, real exchange rates adjust through a nominal depreciation, lower domestic prices, or both. This paper studies how the nature of that adjustment shapes the productivity response. Using Spanish manufacturing microdata, it shows that, in a currency union, cleansing through firm exit is stronger than under a floating regime, with aggregate productivity rising despite weaker firm-level performance. A small open economy DSGE model with firm dynamics, endogenous markups, and nominal rigidities rationalizes this finding. The model identifies three channels through which a sudden stop affects productivity: pro-competitive, cost, and demand. While only the first operates under a floating regime, all three are active in a currency union. Quantitatively, the model explains about 60% of the exit-driven contribution to productivity growth in Spain’s 2010–13 episode. Cross-country evidence confirms that the fall in productivity during sudden stops is systematically larger when exchange rates are more flexible. |
| Keywords: | Sudden stops; Exchange rate policy; Productivity; Firm dynamics |
| JEL: | D24 L11 L25 E52 F32 F41 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20555 |
| By: | Benigno, Gianluca; Rebucci, Alessandro; Zaretski, Aliaksandr |
| Abstract: | In this paper, we revisit the question of how to manage financial crises using the framework proposed in Bianchi and Mendoza (2018). We show that this model economy exhibits a multiplicity of constrained-efficient equilibria, which arises because the private shadow value of collateral influences the forward-looking asset price. Among these equilibria, the specific one studied by Bianchi and Mendoza (2018) can be implemented using a tax/subsidy on debt alone. In that case, both the ex ante tax and ex post subsidy are quantitatively important for welfare under the optimal time-consistent policy. Limiting either component can lead to a welfare loss relative to the unregulated competitive equilibrium, highlighting the complementarity between crisis prevention and crisis resolution tools. We also show that, under certain conditions, all Pareto-dominant constrained-efficient equilibria entail the unconstrained allocation chosen by a social planner subject to the country budget constraint, and this allocation can be implemented with purely ex post policies. |
| Keywords: | Asset prices; Constrained efficiency; Financial crises; Macroprudential policy; Optimal policy; Pecuniary externalities |
| JEL: | E61 F38 F44 H23 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20778 |
| By: | Clausing, Kimberly; Obstfeld, Maurice |
| Abstract: | The year 2025 brought a remarkable shift in the role of tariffs in the US economy, as the Trump administration simultaneously escalated the use of broad tariffs and ensured that Congress enacted large income tax cuts. This fiscal switch has important implications for the US tax system. While maintaining tariff rates at summer 2025 levels would generate large government revenues, such broad tariffs have significant downsides: Efficiency losses would approach one-third of revenues raised, the tax system would be less progressive, and there would be serious tax administration concerns. The fiscal shift also has significant macroeconomic implications, although probably not the intended ones. Broad tariffs generate a large negative supply shock, simultaneously raising prices and reducing macroeconomic activity. |
| Keywords: | Tariffs |
| JEL: | F13 F32 F38 F42 F52 H21 H23 H26 H68 L52 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20677 |
| By: | Maurice Obstfeld (Peterson Institute for International Economics; Peterson Institute for International Economics) |
| Abstract: | Once one of the world's 10 wealthiest nations, Argentina has never fully recovered from its post-World War I decline. Now, as Washington renews its focus on Latin America, libertarian president Javier Milei is betting on close ties with the Trump administration to secure lasting economic stability in Argentina, but sustained US support is not assured. Milei should revamp Argentina's exchange rate regime and monetary policy to build on his successes and strengthen his chances in the 2027 election. |
| Keywords: | Argentina, inflation stabilization, economic reform, exchange rate, foreign exchange intervention, Trump corollary |
| JEL: | E31 E52 E63 F5 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:iie:wpaper:wp26-12 |
| By: | Carvalho, Cecilia; Monte, Daniel; Ornelas, Emanuel |
| Abstract: | Motivated by the recent weakening of the multilateral trading system, we examine the sustainability of a rules-based trade regime in a dynamic model in which the leading country chooses the trade regime and leadership evolves over time. We show that a hegemon is required to establish a rules-based regime, but not to sustain it: once in place, such a regime may be upheld even by non-hegemonic leaders that would otherwise prefer a power-based system, especially if they anticipate losing dominance. But a rules-based equilibrium exists only under a delicate set of conditions: the costs of establishing it must be moderate, countries must be sufficiently patient, and leadership turnover must be frequent. In a bipolar state, free-riding and market-power forces pose additional challenges to sustaining rules-based equilibria. We also characterize the trade-offs involved in redesigning the multilateral trading system to preserve its viability. If the leading country becomes shortsighted and threatens to dismantle it, the system must become more efficient, grant greater discretion to the leader, or exclude it altogether. |
| JEL: | F02 F13 F53 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20751 |
| By: | Ifrim, Adrian; Kollmann, Robert; Pfeiffer, Philipp; Ratto, Marco; Roeger, Werner |
| Abstract: | Based on an estimated two-region dynamic general equilibrium model, we show that the persistent productivity growth differential between the Euro Area (EA) and rest of the world (RoW) has been a key driver of the EA trade surplus since the launch of the Euro. A secular decline in the EA’s spending home bias and a trend decrease in relative EA import prices account for the stability of the EA real exchange rate, despite slower EA output growth. By incorporating trend shocks to growth and trade, the analysis departs from much of the open-economy macroeconomics literature which has focused on stationary disturbances. Our results highlight the relevance of non-stationary shocks for the analysis of external adjustment. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20476 |
| By: | Chupilkin, Maxim; Javorcik, Beata; Peeva, Aleksandra; Plekhanov, Alexander |
| Abstract: | This paper examines the impact of economic sanctions on the choice of invoicing currencies in international trade, focusing on the sanctions imposed on Russia following its full-scale invasion of Ukraine in February 2022. Using transaction-level data on Russia’s imports from 2016 to 2023, we document a significant shift away from US dollar (USD) invoicing toward increased use of the Chinese renminbi (CNY), particularly in trade with China and other neutral economies. By the second half of 2023, the CNY accounted for over a third of Russia’s import value, up from less than 4 percent in 2021. Employing a difference-in-difference approach, we identify several mechanisms driving this shift: geopolitical alignment, financial infrastructure such as currency swap lines with the People’s Bank of China, the threat of secondary sanctions, and rising transaction costs in Western currencies. Strategic complementarities and the exit of Western firms further accelerated this currency switching. Our findings suggest that trade sanctions, beyond reshaping trade flows, also contribute to fragmentation in the international monetary system, with long-term implications for the dominance of the USD in global commerce. |
| Keywords: | China; Russia |
| JEL: | E42 F14 F31 F51 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20471 |
| By: | Kara, A. Hakan; Simsek, Alp |
| Abstract: | Türkiye's response to post-pandemic inflation is a cautionary tale of how political pressure for low interest rates can create macroeconomic instabilities. While central banks worldwide raised interest rates to combat inflation in 2021-2023, Turkish authorities pursued the opposite strategy: cutting real rates to deeply negative levels while implementing financial engineering tools, FX interventions, and financial repression to stabilize markets. The centerpiece was a novel FX-protected deposit scheme (KKM) that guaranteed depositors against currency depreciation, shifting exchange rate risk to the government balance sheet. We provide a detailed account of this policy experiment and develop a theoretical model focusing on how KKM functions and creates vulnerabilities. Our model reveals that pressure to keep interest rates below inflation-targeting levels can lead to an interconnected destabilizing sequence. Low rates generate inflation, current account deficits, and exchange rate depreciation. KKM provides partial stabilization by effectively raising rates for savers while maintaining low rates for borrowers. However, this creates growing contingent fiscal burdens and vulnerability to self-fulfilling currency and sovereign debt crises. This explains additional policies adopted including capital flow management, financial repression, and return to orthodox monetary policy. As central banks worldwide face renewed pressure to set lower policy rates, Türkiye's experience illustrates the consequences. |
| Keywords: | Monetary policy; Central bank independence; Currency crises; Sovereign debt crises; Fx reserves; exchange rate |
| JEL: | E52 E58 E43 F31 F32 F41 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20647 |
| By: | Matthieu Bellon; Matthias Gnewuch; Luca Zavalloni |
| Date: | 2026–07–17 |
| URL: | https://d.repec.org/n?u=RePEc:stm:wpaper:78 |
| By: | Biermann, Marcus; Huber, Kilian |
| Abstract: | We show that multinational firms transmit shocks across countries through their internal capital markets. We study a credit supply shock to parent firms in Germany. International affiliates outside Germany supported their parents through internal lending, became financially constrained themselves, and experienced lower real growth. We find that managers were “Darwinist†with respect to international affiliates but “Socialist†in the home country, that internal capital markets transmitted the credit shock more strongly than a nonfinancial shock, and that access to developed credit markets attenuated the real effects. The total real impact of shock transmission through multinationals on foreign economies was large. |
| Keywords: | Multinational firms; Banking crisis; Internal capital markets |
| JEL: | F2 F3 G2 G01 D2 E44 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20336 |
| By: | Mateus Maquiadi |
| Abstract: | We identify FX demand and FX supply shocks using a Bayesian Structural VAR with sign restrictions and employ Local Projections to estimate their dynamic effects on inflation in Angola, comparing results obtained using the official and parallel exchange rates. In addition, State- Dependent Local Projections are used to assess whether the degree of exchange rate segmentation alters the intensity of exchange rate pass-through. The results show that FX demand shocks generate rapid, persistent, and statistically significant inflationary effects, whereas positive FX supply shocks produce weaker disinflationary effects. The findings further suggest that the parallel FX market plays an important role in price formation in some sectors of the economy and that exchange rate segmentation influences the transmission of exchange rate shocks to domestic prices. |
| Keywords: | Exchange Rate Pass-Through; Inflation Dynamics; FX Demand and Supply Shocks; Exchange Rate Segmentation; Angola. |
| JEL: | E31 F31 C32 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:ise:remwps:wp04212026 |
| By: | Arifovic, Jasmina; Salle, Isabelle; Schilling, Linda |
| Abstract: | This study examines currency competition between a centrally managed currency, the Dollar, and a rigid-supply alternative, Bitcoin, focusing on the role of monetary policy. Using theoretical modeling and laboratory experiments, we show that proportional transfers, modeled as interest on Dollar balances, increase Dollar trade shares (Dollar dominance) and reduce Dollar velocities, thereby weakening the pass-through of monetary policy to prices. These dynamics are self-fulfilling: low inflation expectations drive trade shifts and slower spending, which in turn suppress Dollar prices. In the lab, we observe how evolving expectations shape trade, velocity, and inflation. Dollar policy induces inflation spillovers into Bitcoin by crowding out trade, despite Bitcoin’s lack of a monetary authority, revealing the limits of central bank influence in an increasingly pluralistic monetary system. |
| JEL: | E5 E4 C92 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20529 |
| By: | Bergholt, Drago; Røisland, Øistein; Sveen, Tommy; Torvik, Ragnar |
| Abstract: | There is a common view that if monetary and fiscal policy are to be used together for macroeconomic stabilization, they should pull in the same direction. We challenge this view by analyzing the optimal policy mix in a small open economy. We show that when the economy is hit by inflation shocks or exchange rate shocks, monetary and fiscal policy should pull in opposite directions. This policy mix makes more effective use of the exchange rate channel of monetary policy, allowing inflation to be reduced after a shock with lower costs in terms of unemployment. Only in the case of demand shocks, or if there are significant costs associated with the active use of the interest rate, should monetary and fiscal policy pull in the same direction. We then consider automatic stabilizers. As we show, for demand shocks, automatic stabilizers imply that monetary and fiscal policy pull in the same direction. For inflation and exchange rate shocks, on the other hand, automatic stabilizers imply that the two policy instruments pull in opposite directions. These policy interactions are all consistent with our results on the optimal policy mix. Strong automatic stabilizers could therefore serve as a substitute for optimal discretionary fiscal policy in open economies. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20391 |
| By: | João Tovar Jalles |
| Abstract: | This paper reassesses the claim that Economic and Monetary Union (EMU) membership generated large external wealth losses among Southern European economies. Replicating the synthetic control estimates of Alcobia et al. (2025), we confirm sizeable post-EMU deteriorations in the net international investment positions (NIIP) of several peripheral economies, particularly Portugal and Greece. However, the estimated e??ects prove highly sensitive to treatment timing, donor-pool composition, predictor selection, and estimator choice. Alternative treatment definitions reveal substantial anticipation e??ects associated with Maastricht convergence and pre-EMU financial integration. Broader donor pools and macro-financial predictor sets frequently alter the magnitude and even the sign of estimated e??ects. Estimates obtained using Augmented SCM, Synthetic Di??erence-in-Di??erences, Interactive Fixed E??ects, and local projections are generally smaller, less stable, and considerably more uncertain than baseline SCM results. We further argue that NIIP deterioration partly reflected convergence dynamics and global financial conditions rather than EMU-specific institutional failures alone. |
| Keywords: | Economic and Monetary Union, synthetic control methods, external imbalances, net international investment position, financial integration. |
| JEL: | C21 C23 F32 F45 O52 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:ise:remwps:wp04222026 |
| By: | KONAN, Estelle; SOPOUDE, Anne-Marie; DADAKPETE, David |
| Abstract: | Faced with an ever-increasing financing gap, African economies need to find urgent solutions. With domestic capital markets underdeveloped, private investment is struggling to take off and fully play its role as a lever of economic growth. For some, the key could be greater financial integration, as this would revitalize the domestic financial system. Yet, some studies suggest that this effect is mainly observed in more advanced economies. This paper contributes to this debate by investigating the relation between financial development and financial integration using a sample of 39 African countries observed from 2000 to 2019. Dynamic panel estimation using GMM suggests that increased financial integration leads to higher financial development in Africa. This result can be attributed to the recent upward trend in financial development and financial integration observed in African countries. Expanding our empirical framework to include the spatial dimension, we observe that African countries are surrounded by neighbors with similar levels of financial development. Additionally, our spatial econometric modeling reveals that a country’s total assets held by deposit money banks, are positively influenced by those of its neighboring countries. |
| Keywords: | Financial Integration, Financial Development, GMM |
| JEL: | C21 C23 E44 F36 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128121 |