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on Open Economy Macroeconomics |
| By: | Sushant Acharya; Edouard Challe; Louphou Coulibaly |
| Abstract: | We show that incorporating uninsurable countercyclical income risk into a standard international RBC model can qualitatively and quantitatively account for the quantity puzzles in open-economy macro, namely (i) the Backus-Smith puzzle, (ii) the Backus-Kehoe-Kydland puzzle and (iii) the weak correlation between the trade balance and the exchange rate. We also show that our model can simultaneously account for the Fama puzzle and the evidence that high interest rate countries have stronger currencies—which representative-agents models that rely only on financial or demand shocks cannot jointly account for. Crucially, our model resolves all these puzzles while relying solely on productivity shocks, and thus generates the observed domestic and cross-country macroeconomic comovement. |
| JEL: | F41 F44 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35448 |
| By: | Martin Hodula; Jan Janku; Simona Malovana |
| Abstract: | This brief shows that geopolitical shocks transmit through a spatial exposure channel linked to countries' geographic distance from conflict zones. Using monthly data for 40 advanced and emerging economies over 1995-2024 and local-projection methods, we document a clear distance gradient. Equity flows reallocate rapidly toward economies farther from the conflict, while debt flows adjust more gradually. Exchange rates respond immediately: proximate currencies depreciate and distant currencies appreciate. Geographic proximity thus independently shapes international spillovers, influencing both anticipatory exchange-rate movements and the subsequent redistribution of global capital. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:cnb:rbrief:2026/01 |
| By: | Federle, Jonathan-Julian; Greenwood, Robin; Meyer, Josefin; Reinhart, Carmen M.; Trebesch, Christoph |
| Abstract: | We study how wars and military threats affect financial markets. Leveraging more than 300, 000 monthly price observations since 1822, we create an external currency bond index for more than 90 countries - the EXBI. Using the EXBI, we document large effects of wars on returns and borrowing costs. In a global external bond portfolio, a one-standard-deviation war shock lowers returns by five percentage points. At the country level, wars at home generate sharp losses and increase default risk. Military threats depress bond prices in threatened states, but not in threatening ones, highlighting their role as a channel for eoeconomic coercion. |
| Keywords: | sovereign bond returns, war risk, geopolitical risk, militarized disputes, sovereign default, global financial history, conflict and finance, international capital markets |
| JEL: | F34 G15 H56 N20 E44 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ifwkwp:341991 |
| By: | Joshua Aizenman; Jamel Saadaoui; Gazi Salah Uddin; Naoki Yago |
| Abstract: | This paper studies whether countries with larger foreign exchange and gold reserve buffers exhibit smaller exchange-rate responses to US monetary policy surprises. We test a central-bank reserve balance-sheet channel in which large reserve stocks can deter speculative pressure by signaling credible dollar-liquidity capacity, collateral value, and future intervention capacity, even without contemporaneous reserve sales. For identification, we use high-frequency FOMC monetary surprises, minute-level exchange rates, and predetermined reserve holdings for 18 countries. Countries with larger dollar reserves exhibit smaller exchange-rate depreciations after US monetary tightening, while non-dollar reserves do not display the same pattern. Gold reserves are also associated with smaller depreciations. These buffer effects are concentrated in countries without swap and repo lines and are strongest where dollar exposure, especially external dollar liabilities, is larger. The results show that reserve composition and access to dollar liquidity facilities, not only aggregate reserve size, are empirically relevant for exchange-rate resilience. |
| Keywords: | monetary policy spillovers, exchange rates, foreign exchange reserves, gold reserves, dollar liquidity |
| JEL: | E52 E58 F31 F32 F41 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-61 |
| By: | Joseph E. Gagnon (Peterson Institute for International Economics); Nishtha Agrawal (Peterson Institute for International Economics) |
| Abstract: | Global trade imbalances have gained attention following President Donald Trump's reelection, with China's trade surplus increasing and the US trade deficit remaining historically high. This paper estimates models that can explain nearly half of the historical imbalances, with a large share of the imbalances arising from government policies. The evidence strongly suggests that governments can buy current account surpluses. The paper extends previous research (Gagnon and Sarsenbayev 2021) by six years and roughly 1, 000 observations. |
| Keywords: | current account, fiscal balance, foreign exchange intervention, official financial flows |
| JEL: | F32 F41 F42 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:iie:wpaper:wp26-13 |
| By: | Husnu C. Dalgic; Galip Kemal Ozhan |
| Abstract: | This paper studies how dominant-currency pricing affects currency risk premia. Empirically, we extract common risk factors from excess currency returns using principal components and relate countries’ factor exposures to observable macroeconomic characteristics, with export dollar invoicing emerging as a predictor of carry trade exposure. A small open-economy model with dominant-currency pricing and dollar-denominated liabilities explains why. Dollar export invoicing weakens the exchange rate's stabilizing effect on external demand, while dollar debt makes depreciation costly for leveraged intermediaries. When the two frictions interact, depreciations occur in bad states, local-currency assets become risky, the currency premium rises, and the risk-adjusted neutral rate increases. Under a standard Taylor rule, this mechanism generates persistently higher inflation. |
| Keywords: | Currency returns; dominant currency pricing; uncovered interest parity; inflation; dollar debt |
| Date: | 2026–07–31 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/158 |
| By: | Maria Luiza Cunha (Cedeplar/UFMG); Frederico Gonzaga Jayme Jr (Cedeplar/UFMG); Clara Zanon Brenck (Cedeplar/UFMG) |
| Abstract: | This paper provides an empirical assessment of the sectoral pass-through effect for the Brazilian economy, focusing on the final consumer perspective. To do so, we analyze the impulse response functions of an exchange rate depreciation shock on the main Brazilian consumer price index (IPCA) subgroups. The results indicate a heterogeneous effect across sectors, which varies according to the market competition structure, the production structure of the industry, and the greater or lesser presence of imported inputs. Sectors characterized by the production of non-tradables show a non-significant response to the shock. This discussion segregated by consumption groups is relevant as it opens paths for investigating the extent to which exchange rate pass-through may generate distributive effects. |
| Keywords: | Pass-through; Sectoral Inflation; Tradable and non-Tradable. |
| JEL: | E31 F41 O47 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:cdp:texdis:td700 |
| By: | Saffie, Felipe; Varela, Liliana; Yi, Kei-Mu |
| Abstract: | We study empirically and theoretically the effects of international financial flows on resource allocation. Using the universe of firms in Hungary, we show that removing capital controls lowers firms’ cost of capital and increases household consumption, with the latter playing a dominant role. The consumption channel leads to reallocation of resources toward high ex penditure elasticity activities—such as services—promoting both the expansion of incumbents and firm entry. A multi-sector heterogeneous firm model replicates these dynamics. Our model shows that non-homotheticity in consumption can quantitatively account for the reallocation of resources towards services and successfully replicates the dynamics of aggregate productivity following episodes of financial openness. |
| Keywords: | firm dynamics;financial liberalization;reallocation;capital flows;TFP;non-homothetic preferences |
| JEL: | F14 F41 |
| Date: | 2026–07–08 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:137804 |
| By: | Tatjana Dahlhaus (Bank of Canada); Malik Shukayev (University of Alberta); Alexander Ueberfeldt (Bank of Canada) |
| Abstract: | Natural disasters pose complex challenges for monetary policy in resource-rich small open economies. Using an open-economy dynamic stochastic general equilibrium model calibrated to Canada, we embed stochastic disaster shocks affecting capital, productivity, and the commodity sector. Drawing on detailed historical data, we quantify disaster-specific transmission channels and show that most disasters act as supply shocks, reducing output and modestly raising inflation. The magnitude and persistence of these effects depend on disaster type, sectoral exposure, and spillovers through global trade and terms-of-trade channels. The framework provides a forward-looking assessment of climate-related risks and their implications for monetary policy. |
| Keywords: | Natural Disasters; Climate Shocks; Monetary Policy Trade-offs; DSGE Model; Terms-of-trade Effects |
| JEL: | E52 Q54 F41 E12 E31 C68 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:ris:albaec:023232 |
| By: | Iván Weigandi (ODI Global) |
| Abstract: | This paper studies the role of global banks as a source of shocks to global liquidity. Shifts in global liquidity can drive cross-border flows, asset prices, and exchange rates, with implications for financial stability. While the existing literature emphasizes global banks as amplifiers of global shocks, I provide causal evidence that idiosyncratic leverage shocks to these institutions loosen global liquidity conditions. The analysis exploits the high concentration of global banking to construct a Granular Instrumental Variable from the size-weighted sum of bank-level idiosyncratic leverage shocks. These shocks are estimated using Instrumented Principal Component Analysis, using observable bank characteristics (e.g., size, profitability, liquidity, and risk metrics) as instruments to account for bank-specific and time-varying exposures to common global factors. Using the instrument and panel local projections, I estimate the dynamic causal effects of these banks’ leverage shocks on key global liquidity measures for an unbalanced panel of 74 advanced and emerging market economies from 2000Q1 to 2022Q4. Positive shocks to global banks’ leverage significantly appreciate exchange rates against the dollar, reduce US dollar-denominated bond spreads, and increase gross cross-border inflows. Significant effects on total cross-border flows indicate broader spillovers across asset markets. These findings underscore the systemic relevance of G-SIBs in driving global financial conditions and support macro-financial models where financial intermediaries’ leverage is a key state variable influencing risk-taking and asset prices. By showing that global banks can originate, rather than merely transmit, global shocks, this paper adds to the literature on the global financial cycle and the international transmission of financial conditions. |
| Keywords: | Global Banks, Capital Flows, Exchange rates, Emerging Market Bond Index, Granular Instrumental Variables, Instrumented Principal Component Analysis, Local Projections. |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:aoz:wpaper:402 |
| By: | Rohan Kekre; Moritz Lenel |
| Abstract: | We interpret exchange rate and yield curve responses to the April 2, 2025 U.S. tariff announcement through the lens of an equilibrium model capturing the portfolio balance mechanism. Disciplined by price elasticities from QE announcements, a 3-12% decline in the demand for dollar bonds (relative to annual U.S. GDP) accounts for the dollar depreciation and rise in dollar yields during this episode. News of a gradual rebalancing out of dollar bonds is consistent with immediate price impact since asset prices are forward-looking. Lower dollar bond demand was accompanied by higher risk aversion, which explains the cross-section of responses across currencies. |
| JEL: | E44 F31 G15 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35466 |
| By: | Ronald Albers; Staffan Lindén |
| Abstract: | The paper proposes an explanatory framework to account for long-term movements in the nominal rate of the Swedish krona against the euro. A model with few variables (short-term interest rate differentials, broad money and a measure of market volatility) tracks trend developments quite well. Our approach is anchored in purchasing power parity theory and empirics. The results show that interest rate differentials affect the exchange rate immediately, while broad money works more slowly as its effects take time to spread, but has a larger impact. The VIX, a measure of market uncertainty, captures short-term volatility and explains large swings during economic crises, consistent with the view that the Swedish krona is a risk-sensitive currency. This results in the euro-krona nominal exchange rate showing broad alignment with purchasing power parity measures over a longer period. |
| Keywords: | Euro-Swedish krona, exchange rates, purchasing power parity, effective exchange rates, uncovered interest parity. |
| JEL: | C3 E31 E4 F31 F37 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:euf:ecobri:091 |
| By: | Ronald Albers; Staffan Lindén |
| Abstract: | The paper proposes an explanatory framework to account for long-term movements in the nominal rate of the Swedish krona against the euro. A model with few variables (short-term interest rate differentials, broad money and a measure of market volatility) tracks trend developments quite well. Our approach is anchored in purchasing power parity theory and empirics. The results show that interest rate differentials affect the exchange rate immediately, while broad money works more slowly as its effects take time to spread, but has a larger impact. The VIX, a measure of market uncertainty, captures short-term volatility and explains large swings during economic crises, consistent with the view that the Swedish krona is a risk-sensitive currency. This results in the euro-krona nominal exchange rate showing broad alignment with purchasing power parity measures over a longer period. |
| Keywords: | Euro-Swedish krona, exchange rates, purchasing power parity, effective exchange rates, uncovered interest parity. |
| JEL: | C3 E31 E4 F31 F37 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:euf:ecobri:092 |
| By: | Ronald Albers; Staffan Lindén |
| Abstract: | The paper proposes an explanatory framework to account for long-term movements in the nominal rate of the Swedish krona against the euro. A model with few variables (short-term interest rate differentials, broad money and a measure of market volatility) tracks trend developments quite well. Our approach is anchored in purchasing power parity theory and empirics. The results show that interest rate differentials affect the exchange rate immediately, while broad money works more slowly as its effects take time to spread, but has a larger impact. The VIX, a measure of market uncertainty, captures short-term volatility and explains large swings during economic crises, consistent with the view that the Swedish krona is a risk-sensitive currency. This results in the euro-krona nominal exchange rate showing broad alignment with purchasing power parity measures over a longer period. |
| Keywords: | Euro-Swedish krona, exchange rates, purchasing power parity, effective exchange rates, uncovered interest parity. |
| JEL: | C3 E31 E4 F31 F37 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:euf:ecobri:093 |
| By: | John D. Burger; Francis E. Warnock; Veronica Cacdac Warnock |
| Abstract: | Emerging market economies (EMEs) have historically been vulnerable to external shocks. Recently the global economy has experienced several major shocks yet EMEs have been remarkably resilient. Some of this improved performance can be attributed to prudent policies and stronger economic fundamentals, but the existing literature points to an overperformance mystery by some EMEs with weaker fundamentals. We evaluate an alternative measure of vulnerability based on the concept of a natural level of capital flows (KF*). Specifically, we hypothesize that EMEs are more vulnerable when prior to a large global shock capital flows—portfolio inflows, to be specific—exceed KF*. Results indicate that for major global shocks over the past two decades the pre-shock gap between actual portfolio and KF* has substantial predictive power for the post-shock performance of EMEs. |
| JEL: | F30 G1 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35463 |
| By: | Tatjana Dahlhaus; Alexander Ueberfeldt; Malik Shukayev |
| Abstract: | Natural disasters pose complex challenges for monetary policy in resource-rich small open economies. Using an open-economy dynamic stochastic general equilibrium model calibrated to Canada, we embed stochastic disaster shocks affecting capital, productivity, and the commodity sector. Drawing on detailed historical data, we quantify disaster-specific transmission channels and show that most disasters act as supply shocks, reducing output and modestly raising inflation. The magnitude and persistence of these effects depend on disaster type, sectoral exposure, and spillovers through global trade and terms-of-trade channels. The framework provides a forward-looking assessment of climate-related risks and their implications for monetary policy. |
| Keywords: | Models and tools; Economic models; Monetary policy; Monetary policy framework and transmission; Structural challenges; Climate change |
| JEL: | C C1 C11 C3 C32 D D6 D63 E E5 E52 Q Q5 Q54 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:26-28 |
| By: | Giovanni Di Bartolomeo |
| Abstract: | We study a currency union facing a common structural transformation. In a stylized two-country framework with reduced-form import leakage, incomplete nominal adjustment, and sectoral capacity constraints, the same union-wide shift can move national reallocation frontiers differently. Countries may then disagree over the preferred common monetary stance even though the primitive disturbance is common. Locally, the common-instrument cost is proportional to the squared distance between national preferred stances, weighted by country size and frontier curvature. Fiscal capacity operates through two distinct margins: transfers compensate countries along given frontiers, whereas procurement and capacity investment can move those frontiers and reduce the underlying monetary disagreement. |
| Keywords: | optimum currency areas, currency union, monetary conflict, fiscal capacity, structural transformation, sectoral reallocation, policy costs |
| JEL: | E52 E58 F33 F45 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ter:wpaper:00207 |
| By: | Rubén Domínguez-Díaz (Banco de España); Marta Domínguez-Jiménez (CEMFI, Centro de Estudios Monetarios y Financieros); José-Elías Gallegos (Banco de España); Javier Quintana (Banco de España) |
| Abstract: | This paper explores the macroeconomic consequences of levying tariffs on imported investment goods, which directly affect the household’s investment Euler equation. First, we construct a new multi-country and multi-sector investment input-output matrix to trace investment goods through international production chains. Second, we embed this in an open-economy New Keynesian model with production networks. In a uniform US tariff experiment, this channel more than doubles the impact contraction in GDP, with investment-goods exposure as the best predictor of aggregate output losses. Holding the average tariff fixed, redesigning its composition to avoid the investment network cuts cumulative domestic output losses by two-thirds. |
| Keywords: | Tariffs, capital accumulation, investment goods, production networks, sectoral incidence. |
| JEL: | E22 E31 E32 F41 F44 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:cmf:wpaper:wp2026_2610 |
| By: | Gabriel Montes-Rojas (IIEP-UBA/CONICET); Fernando Toledo (UNLP); Juan Manuel Rodríguez Repeti (IIEP-UBA) |
| Abstract: | This paper studies what happens when AI gets cheaper, with emphasis on the labor market outcomes, whether it creates formal jobs or whether it pushes workers into informality. We argue that the answer depends on the elasticity of substitution between imported AI capital and formal labor. We build a small open economy DSGE model with a dual labor market, imported AI capital, and country risk, calibrated to an economy where informality is pervasive. The same decline in AI prices produces sharply different labor-market outcomes depending on whether AI substitutes or complements formal workers. Under substitution, cheaper AI weakens formal labor demand and increases the role of the informal sector as an employment buffer. Under complementarity, it expands formal employment and amplifies output, wages, investment, and capital accumulation. The model therefore shows that AI can become either a source of displacement pressure or a driver of formal-sector expansion, depending on how it interacts with human labor. |
| Keywords: | Artificial Intelligence, Informal Economy, Dual Labor Markets, DSGE, Latin America |
| JEL: | E26 F41 O33 J46 C68 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:aoz:wpaper:401 |
| By: | Ece Ozge Emeksiz; Andres Fernandez; Nikhil Patel; Ivan Petrella; Tatjana Schulze |
| Abstract: | This paper proposes a sign-narrative VAR approach to identifying financial shocks in currency markets. The approach imposes minimal sign restrictions shared across canonical exchange rate models, leveraging their key insights while remaining robust to misspecification relative to structural models typically used in the literature. To sharpen the identification, sign restrictions are complemented with narrative restrictions anchored on episodes of well documented FX market dysfunction. Focusing on two emerging economies (Brazil and Chile), our estimates suggest that financial shocks account for about one third of UIP fluctuations, and contribute less than 10% to the variance of macro variables including output and inflation. While infrequent, when they do materialize, financial shocks trigger sharp declines in output, suggesting economically meaningful spillovers from frictions in currency markets to the real economy. |
| Keywords: | Exchange rates; financial shocks; uncovered interest parity; narrative VARs |
| Date: | 2026–07–31 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/162 |
| By: | Marta Domínguez-Jiménez (CEMFI, Centro de Estudios Monetarios y Financieros); Santiago Etchegaray (CEMFI, Centro de Estudios Monetarios y Financieros) |
| Abstract: | Why do some economies experience a pronounced manufacturing phase during structural transformation, while others move more directly into low-skilled services? This paper shows that financial underdevelopment, by shaping export competitiveness and domestic investment demand, is a quantitatively important driver of flat-manufacturing paths. Motivating evidence links financial depth to manufacturing activity and export performance. We then quantify the mechanism in a dynamic multi-country model of structural transformation and trade, where financial underdevelopment both weakens competitiveness in finance-dependent sectors and lowers demand for manufacturing-intensive investment goods. Moving flat-manufacturing economies halfway to the financial frontier closes over a quarter of the observed flat–steep peak gap; it raises real output per worker by 13 to 17 percent and real consumption per worker by 8 to 12 percent. Paired with lower nonfinancial trade costs, the same financial improvement closes almost three quarters of the peak gap, as finance shapes the manufacturing response that openness amplifies. |
| Keywords: | International trade, Financial frictions, Structural transformation. |
| JEL: | F12 F14 F36 F43 O14 O16 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:cmf:wpaper:wp2026_2607 |
| By: | Gregor Matvos; Brent Neiman |
| Abstract: | Financial sanctions are widely viewed as a powerful tool of economic statecraft, yet direct evidence on their effects remains limited. We study how sanctions affect access to global payment networks using data on correspondent banking relationships, which link banks across countries and currencies to enable cross-border transactions. We first show that the dollar and euro networks offer the broadest global connectivity, supported by a small number of key hubs in the U.S. and Europe. Sanctions that restrict access to these hubs are therefore potentially powerful. We then show how financial sanctions imposed during 2021-2025 – a period of rapid growth in sanctions – reduced targeted banks' access to major-currency networks by severing correspondent relationships. Sanctioned institutions often retained access but only through longer, indirect, and more fragile chains of intermediaries. Finally, in countries where sanctions expanded sharply, non-sanctioned banks also lost connectivity to Western networks, likely reflecting de-risking. These banks reoriented toward alternatives, particularly the Chinese yuan. Outside these heavily sanctioned economies, shifts away from the dollar and toward the yuan remain minimal on average. |
| JEL: | F3 F5 G2 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35453 |
| By: | Brandon Joel Tan |
| Abstract: | This paper studies how dollar stablecoins affect parallel foreign-exchange markets in economies with fixed or heavily managed exchange rates. When foreign currency is rationed, the true degree of exchange-rate misalignment is not directly observed. Traditional parallel markets reveal it only imperfectly because information is dispersed across bilateral and often private trading opportunities. Stablecoins make dollar-like claims easier to access outside the official allocation system, but they also create a visible, high-frequency price that aggregates order flow in a common venue. I develop a global-games model in which households observe dispersed private signals about misalignment, while stablecoin market depth determines the precision of a common public signal. Stablecoins generate a state-dependent welfare effect. They expand access to foreign-currency and can improve allocation by making beliefs about misalignment more informative, but the same public price can also coordinate runs by making beliefs and actions more synchronized. When misalignment is low, access and allocation gains dominate, so stablecoins raise welfare. When misalignment is high, the coordination externality becomes more costly: a more precise public signal compresses belief dispersion, strengthens coordinated exit incentives, and can overturn the access benefit. This points to a state-contingent approach that preserves low-cost access in normal states while using temporary, targeted measures to manage large or run-like flows when misalignment is high. |
| Keywords: | stablecoins; fixed exchange rates; parallel foreign-exchange markets |
| Date: | 2026–07–10 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/144 |
| By: | Karlo Kotarac (Valcon); Davor Kunovac (Croatian National Bank, University of Rijeka, Faculty of Economics and Business); Ozana Nadoveza (University of Zagreb, Faculty of Economics and Business) |
| Abstract: | We estimate a Structural Dynamic Factor Model for 165 NUTS 2 regions across 11 euro area countries over 2000–2023, decomposing regional GDP growth into common euro area, countryspecific, and regional components. This is the first structural shock decomposition at the regional level for the euro area, suitable to evaluate optimum currency area (OCA) properties along both shock-similarity and monetary policy transmission dimensions. Four findings emerge. First, the relative importance of common euro area shocks has increased steadily at both the country and union levels, indicating improving OCA properties, while country-specific components - most pronounced in peripheral economies - have declined, pointing to a gradual erosion of the border effect. Second, aggregate business cycle synchronization conceals substantial within-country heterogeneity, implying that the costs of relinquishing monetary policy autonomy are distributed unevenly across regions and countries. Third, euro area regional dynamics are driven predominantly by endogenous OCA convergence rather than specialization-induced divergence; regions with atypical sectoral compositions do face greater exposure to idiosyncratic shocks, but this reflects structural or geographic distinctiveness rather than integration-driven specialization. Fourth, monetary policy shocks generate smaller and more homogeneous regional output responses than demand or supply shocks, and transmission heterogeneity - while modestly increasing over the sample - reflects within-country regional divergence rather than cross-country fragmentation. Taken together, OCA properties at the regional and country levels are broadly comparable, and heterogeneous monetary transmission does not constitute a major threat to policy effectiveness. |
| Keywords: | Regional divergence, Regional heterogeneity, Monetary policy, SDFM |
| JEL: | E32 E52 F45 |
| Date: | 2026–07–23 |
| URL: | https://d.repec.org/n?u=RePEc:hnb:wpaper:76 |
| By: | Etienne Farvaque (University of Lille, CNRS, IESEG School of Management, Lille; CIRANO, Montréal); Alexander Mihailov (Department of Economics, University of Reading); Piotr Stanek (Department of International Economics, Krakow University of Economics) |
| Abstract: | This paper examines how monetary policy rules operate under conditions of institutional reform, external constraints, and war in Ukraine as a case of prospective European monetary integration. Using monthly data from 2009 to 2026, we estimate Taylor-type reaction functions for the National Bank of Ukraine, allowing the setting of the policy rate to respond to inflation gaps, industrial-production activity gaps, exchange-rate pressure, interest-rate smoothing, and regime-specific wartime interactions. We then compute deviations between actual and model-implied policy rates and test whether these deviations are associated with institutional shifts, geopolitical shocks, conflict intensity, and social disruption. The results show that Ukrainian monetary policy remained partly rule-like even during periods of extreme stress. Interest-rate smoothing is strong, exchange-rate pressure enters the effective reaction function, and the largest deviations cluster around moments of nonlinear constraints: the 2015 currency crisis, the initial full-scale-invasion policy freeze, and the June 2022 credibility-restoring interest rate hike. These findings suggest that wartime central banking is not best understood as a suspension of rules. Rather, war generates constraint-contingent rule adaptation, in which credibility is preserved through temporary modifications of the instruments, coefficients, and state variables governing policy. The paper contributes to debates on rules versus discretion by showing how monetary-policy credibility can coexist with resilience-oriented adjustment in an emerging market economy exposed to geopolitical rupture. It also speaks to Ukraine’s European trajectory: eventual monetary integration will depend not only on nominal convergence, but on the demonstrated capacity to preserve rule-based credibility under extreme political and security shocks. |
| Keywords: | Taylor-type rules, Ukraine, exchange-rate stabilization, inflation targeting, geopolitical risk, wartime monetary policy, National Bank of Ukraine |
| JEL: | E52 E58 F31 F41 O52 P34 |
| Date: | 2026–08–05 |
| URL: | https://d.repec.org/n?u=RePEc:rdg:emxxdp:em-dp2026-08 |
| By: | Armando Alvarez; Esteban Perez-Caldentey; Giuliano Toshiro Yajima |
| Abstract: | This paper develops a stock-flow consistent (SFC) exercise for a smaller and dollarized economy and applies it to the case of El Salvador. Against the backdrop of the 2025 IMF-supported fiscal adjustment program, we reassess the origins of rising public debt and persistent external deficits within a unified sectoral balances framework. In particular, we show the importance of remittances and terms-of-trade effects to capture the structural determinants of the Salvadorian economy. We then reassess the impact of the IMF program within our framework. As exemplified by the case of El Salvador, smaller economies are characterized by persistent twin deficits. Within a stock-flow consistent framework, this sets the stage to analyze the dynamics of the economy of El Salvador in terms of the interaction between the fiscal stance and foreign trade performance ratio. The analysis underscores the centrality of the external constraint in shaping growth and debt trajectories and offers a coherent macro-financial framework for evaluating policy trade-offs in dollarized economies. |
| Keywords: | dollarization; stock-flow consistent models; sectoral balances; external constraint; fiscal policy |
| JEL: | E12 E62 F32 F41 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:lev:wrkpap:wp_1123 |
| By: | Chiara Ferrero; Sansan Vincent de Paul Kambou; Kady Keita |
| Abstract: | We provide new evidence on the de facto seniority structure of sovereign debt. Using a measure of the Relative Percentage in Default (RPID) by creditor group for 119 low-income and emerging market countries over the period 1980–2022, we show that debt owed to the IMF and the World Bank is, on average, the most senior, followed by debt owed to official bilateral creditors. Private creditors, notably bondholders and commercial banks, are on average junior to official creditors, with commercial banks being the least prioritized group for repayments. Beyond characterizing the seniority hierarchy, our empirical analysis shows that creditor composition has economically meaningful implications for sovereign risk. Using an instrumental variable estimation, we show that IMF credit outstanding as a share of GNI is robustly and negatively associated with the probability of a debt crisis. This stabilizing effect weakens progressively as debt stocks rise, suggesting that the IMF's crisis-preventing role diminishes in situations of severe debt overhang. Turning to sovereign borrowing costs, we find that IMF lending is negatively associated with sovereign bond spreads. |
| Keywords: | sovereign default; debt crisis; market access; bonds spreads; creditors compositions; debt seniority |
| Date: | 2026–07–31 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/161 |
| By: | Adele Bergin; Luke Doyle; Stephen Millard |
| Abstract: | In this paper, we use a model simulation‐based approach to assess the macroeconomic impact of US tariffs on the Northern Ireland (NI) economy. More specifically, we use AMNIE, a newly developed structural macroeconomic model for NI, designed for medium‐term economic projections and policy analysis to examine quantitatively the effects of tariffs of different sizes set by the United States on EU and UK exports. We find that Northern Ireland experiences persistent output losses across all tariff scenarios, with trade acting as the primary transmission channel. Further, targeted tariffs on major trading partners generate substantially larger effects than uniform global tariffs, reflecting Northern Ireland's strong integration with UK and EU markets. Finally, while Northern Ireland is significantly affected, cross‐country comparisons show that its exposure lies between that of the United Kingdom, which experiences larger declines, and the European Union, where impacts are somewhat more moderate. While these effects may be partially mitigated by trade deflection under Northern Ireland’s dual‐market access, the magnitude is uncertain and likely to depend on the scale of tariff differentials, with evidence suggesting that sizeable rerouting effects typically arise only in response to larger tariff shocks. |
| Keywords: | Macroeconomic simulation, US tariffs, Northern Ireland, trade deflection |
| JEL: | C53 E17 F13 F15 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:nsr:niesrd:581 |
| By: | Iñaki Aldasoro; Leonardo Gambacorta; Enisse Kharroubi; Matthias Rottner |
| Abstract: | The AI boom is driving a large, increasingly debt-financed investment surge and boosting trade and equity markets, generating sizeable terms-of-trade and wealth effects that differ across countries. The productivity payoff from AI, though potentially large, remains uncertain and uneven, across both sectors and countries. By simultaneously affecting demand and supply, AI blurs cyclical signals, complicating central banks' assessment of underlying economic conditions and monetary policy calibration. |
| Date: | 2026–07–28 |
| URL: | https://d.repec.org/n?u=RePEc:bis:bisblt:130 |
| By: | Ignatenko, Anna; Lashkaripour, Ahmad; Macedoni, Luca; Simonovska, Ina |
| Abstract: | On April 2, 2025, President Trump declared "Liberation Day, " announcing broad tariffs to reduce trade deficits and revive U.S. industry. We analyze the long-term economic impacts of these tariffs through the lens of a trade model that features flexible tariff passthrough and endogenous trade deficits, calibrated to trade and income data from 194 countries. If trading partners do not retaliate, the tariffs could decrease the U.S. trade deficit and improve its terms of trade, yielding modest welfare gains when tariff revenues reduce the income tax burden for American workers. However, reciprocal retaliation results in net welfare losses for the U.S. economy. We derive the unilaterally optimal tariff within our model and show that the USTR tariffs, based on bilateral deficits, differ markedly from this theoretical benchmark. Our calibrated model implies a unilaterally optimal tariff for the U.S. of 19 percent, uniformly applied across all trading partners, and linked to the overall trade deficit rather than bilateral imbalances. Under optimal foreign retaliation to the USTR tariffs, the calibrated model predicts a decline in U.S. welfare by up to 3.8 percent when accounting for input-output linkages, and a contraction in global employment by 1.1 percent. |
| Keywords: | Tariffs; Trump; Tariff war; China; European union; International trade |
| JEL: | F1 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20225 |
| By: | Kerola, Eeva; McCully, Tuuli; Nuutilainen, Riikka |
| Abstract: | This paper examines whether China has reallocated import sourcing away from West-leaning economies amid heightened geoeconomic tensions and a policy push to strengthen supply chain security. Using monthly bilateral trade data for 121 economies over 2015-2025 and a difference-in-differences framework, we compare changes in countries' shares of China's imports across blocs defined by their official positioning on Taiwan. We find evidence of a relative decline in imports from Westleaning countries beginning in 2018, with divergence strengthening after 2020 and intensifying further in 2022. The pattern is concentrated on a limited set of rawmaterial sectors, especially mineral products and base metals. For goods covered by Western export controls to Russia, we find no evidence of a broader shift in China's sourcing. Overall, China's import realignment appears broad-based across West-leaning source countries, but has so far remained selective across product categories. China's shift toward importing from friendly nations is likely to contribute to larger bilateral trade surpluses with Western economies, provided that China's exports to these markets remain robust. |
| Keywords: | China, international trade, supply chains, fragmentation |
| JEL: | F12 F13 F14 F51 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofitp:342408 |
| By: | Ferrari Minesso, Massimo; Mehl, Arnaud; Triay Bagur, Olga; Vansteenkiste, Isabel |
| Abstract: | This paper, for the first time, analyzes the role of economic, technical, and geopolitical factors in interlinking of payment systems across 117 countries, using new data on fast payment links from 2016 to 2023. We test whether links are governed by standard gravity variables influencing international trade patterns, technical features or by instead—or in addition—geopolitical factors. While we find support for the role of economic factors and technical features, the most striking finding is the strength of geopolitical effects. Our estimates suggests that the reduction in the probability of payment links between geopolitically distant countries is as much as twice stronger than for geographically distant ones. Instrumental variable estimates suggest that the effect is causal. The results are in line with the hypothesis that alignment in country-preferences on sensitive features of contractual agreements along with incentives associated with higher opportunity costs of war emphasized in recent theoretical models play key roles in the establishment of interlinking arrangements. |
| JEL: | E42 F15 F30 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20105 |
| By: | de Haas, Ralph; Mamonov, Mikhail; Popov, Alexander; Shala, Iliriana |
| Abstract: | How do violent conflicts shape cross-border lending? Using syndicated loan data on 14, 021 creditors and 97, 169 firms across 179 countries, we document a dual response. Relative to domestic creditors, foreign lenders reduce overall lending by 27% (supplydriven) but increase lending to military-related sectors by 24% (demand-driven). This reallocation is concentrated among lenders with military-sector expertise but limited country specialization, and flows toward politically non-aligned conflict zones. Preconflict exposure to cross-border lenders is associated with divergent firm-level outcomes: military firms expand assets, revenues, and employment, while exposed civilian firms contract. Violent conflicts thus selectively redirect, rather than uniformly suppress, cross-border credit. |
| Keywords: | Cross-border lending, syndicated loans, violent conflict, military lending, geopolitical fragmentation, credit reallocation |
| JEL: | G21 G15 F34 F51 D74 H56 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofitp:342402 |
| By: | Fernández-Villaverde, Jesús; Li, Yiliang; Xu, Le; Zanetti, Francesco |
| Abstract: | We examine the rise of dark shipping -- oil tankers disabling AIS transceivers to evade detection -- amid Western sanctions on Iran, Syria, North Korea, Venezuela, and Russia. Using a machine learning-based ship clustering model, we track dark-shipped crude oil trade flows worldwide and detect unauthorized ship-to-ship transfers. From 2017 to 2023, dark ships transported an estimated 7.8 million metric tons of crude oil monthly -- 43\% of global seaborne crude exports -- with China absorbing 15\%. These sanctioned flows offset recorded declines in global oil exports but create distinct economic shifts. The U.S., a net oil exporter, faces lower oil prices but benefits from cheaper Chinese imports, driving deflationary growth. The EU, a net importer, contends with rising energy costs yet gains from Chinese demand, fueling inflationary expansion. China, leveraging discounted oil, boosts industrial output, propagating global economic shocks. Our findings expose dark shipping's central role in reshaping oil markets and macroeconomic dynamics. |
| JEL: | C32 C38 E32 Q43 R40 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20009 |
| By: | Oscar Monterroso; Diego Vilán |
| Abstract: | Emerging market economies, particularly those that depend heavily on commodity exports, have long been characterized by more volatile and disruptive business-cycle dynamics than their advanced-economy counterparts. A large literature has studied the drivers of these fluctuations, including total factor productivity shocks, world interest rate shocks, and terms-of-trade disturbances. |
| Date: | 2026–07–31 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:103586 |