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on Open Economy Macroeconomics |
| By: | Loukas Karabarbounis; Bruno Pellegrino; Juliana Salomao |
| Abstract: | We develop a general-equilibrium model of the global economy that integrates heterogeneous firms competing in product markets with countries that allocate capital around the world. Combining a hedonic demand system on the product side with a mean-variance portfolio system on the asset side, we obtain almost closed-form solutions for the equilibrium of the model. We use firm-level data on balance sheets, geographic breakdowns of revenue and employment, and business descriptions along with country-level data on bilateral equity holdings and trade costs to quantify the model to a cross section of roughly 23, 000 listed firms in 48 countries. We use the model to evaluate the reallocation and welfare effects of globalization. Both financial and trade liberalization concentrate activity among the largest firms and raise welfare, with gains being larger in emerging and mid-sized open economies respectively. Product- and capital-market frictions amplify each other, meaning that liberalizing one market reduces the gains from liberalizing the other. |
| JEL: | D2 F36 F60 G11 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35652 |
| By: | Francisco Roldan; César Sosa-Padilla |
| Abstract: | Motivated by the emergence of new official creditors outside the Paris Club framework, we study the interaction between senior official lending and market debt. We develop a quantitative sovereign default model featuring a large senior lender with whom borrowing terms are negotiated. Obtaining more net financing from the market strengthens the government’s bargaining position and improves bilateral terms. This endogenous cross-elasticity erodes the discipline of spreads and amplifies debt dilution, leading to welfare losses even as bilateral borrowing helps avert some defaults ex-post. With pre-specified rules, rewarding market issuance can be enough to generate such losses, and an optimal rule instead raises bilateral rates with net market financing. The direction of the cross-elasticity can thus guide in practice the assessment of new forms of bilateral sovereign debt. |
| JEL: | F34 F41 G15 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35590 |
| By: | Agnès Bénassy-Quéré; Matthieu Bussière; Thaïs Masseï; Arthur Saint-Guilhem |
| Abstract: | We assess the degree of heterogeneity in monetary policy transmission (MPT) across euro area countries for the period 2000–2025. Using monthly local projections, we estimate the effects of monetary policy on a broad set of transmission variables at both euro area and national levels. First, we find limited heterogeneity of output and inflation responses to monetary policy shocks, despite asymmetric responses of mortgage market-related variables. Second, key structural differences, such as households’ indebtedness, debt maturity, interest rate rigidity and sectoral composition, do shape heterogeneities in MPT across euro area countries, according to our results. Considered jointly, though, these differences partly offset one another, leading to a relatively homogeneous transmission of monetary policy. Third, a monthly FAVAR estimation confirms and broadens our local projections results: asymmetry remains contained for output and inflation, but it is higher for sovereign spreads, food prices, credit variables and our consumption proxy. Finally, a rolling-window estimation of the FAVAR model shows that time-varying heterogeneity in MPT is characterized by temporary and crisis-driven divergences that consistently revert to a low baseline, reflecting key monetary policy interventions rather than deeper structural economic divergences. Unconventional monetary policies play a central role in this pattern: they tend to reduce country divergences during crisis periods, impacting more strongly the countries most affected, hence operating, by design, as a heterogeneous policy shock according to our main metric. |
| Keywords: | Monetary Policy Transmission, High-Frequency Identification, Local Projections, FAVAR |
| JEL: | C32 C38 F45 E52 E31 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:1062 |
| By: | Ufuk Can; Oguzhan Cepni; Emrah Ahi |
| Abstract: | Supply disruptions and input shortages have become a central policy concern, yet their effects on trade remain poorly understood. This paper examines how supply-driven shortage shocks affect U.S. exports and imports using monthly data from 1994 to June 2025. Shortage shocks are identified from a news-based shortage index and an alternative supply-stress measure, and their dynamic effects are estimated while controlling for macro-financial conditions and trade policy uncertainty. Three results stand out. First, worsening shortages reduce exports and imports immediately, but the contraction is mostly short-lived. Second, shortage easing supports a slower but more persistent recovery in trade, with stronger medium-term effects for exports. Third, the effects are state-dependent: import responses vary more across time and regimes, and shortages generate disproportionately large trade losses when trade conditions are already weak. These findings suggest that shortage shocks are not symmetric supply disturbances and that policy should focus not only on easing bottlenecks after they emerge, but also on preventing escalation through input diversification, inventory buffers, and supply-chain resilience measures. Overall, shortages are an important source of external-sector vulnerability and a relevant target for trade and macroeconomic policy. |
| Keywords: | Exports, Imports, Shortage shocks, Local projections, Quantile-on-quantile regression |
| JEL: | C32 E32 F14 F41 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:tcb:wpaper:2615 |
| By: | Rodriguez-Clare, Andres; Ulate, Mauricio; Vasquez, Jose P. |
| Abstract: | We present a dynamic quantitative trade and migration model that incorporates downward nominal wage rigidities and show how this framework can generate changes in unemployment and labor participation that match those uncovered by the empirical literature studying the “China shock.†We find that the China shock leads to average welfare increases in most U.S. states, including many that experience unemployment during the transition. However, nominal rigidities reduce the overall U.S. gains by around two thirds. In addition, there are 18 states that experience welfare losses in the presence of downward nominal wage rigidity that would have experienced gains without it. |
| Keywords: | Downward nominal wage rigidity; China shock; Quantitative trade models |
| JEL: | F16 F40 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19222 |
| By: | Christoph Grosse Steffen; Stéphane Lhuissier; Daniel J. Lewis |
| Abstract: | Central bank communications frequently contain information about financial-market backstops that affect monetary policy transmission. We identify these transmission protection surprises in the euro area, alongside policy stance and central bank information surprises, by exploiting heteroskedasticity in minute-by-minute asset price movements. Unlike standard factor models, our approach allows active policy dimensions and their impacts to vary across events. Event-specific decompositions quantify the narrative record and reveal substantial heterogeneity of effects across announcements. We show that transmission protection is a distinct dimension of central bank announcements, with financial-market effects separate from both policy stance and information shocks. |
| Keywords: | Monetary Policy, High-Frequency Identification, Central Bank Communication, Information Effects, Financial Stability, Transmission Protection |
| JEL: | E52 E58 F45 G12 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:1061 |
| By: | Giovanni Covi (Bank of England); Maren Froemel (Bank of England); Dennis Reinhardt (Bank of England); Nora Wegner (Bank of England) |
| Abstract: | How do banks respond to transition risk and which mechanisms drive this response? We shed new light on this question using data on granular international large exposures of UK banks. Climate policy is the main source of transition risk we use. We find that an increase in climate policy stringency on average leads to a decline in the share of lending that is exposed to transition risk. However, this finding is not uniform across banks: banks with a lower initial exposure to transition risk decrease their transition-risk exposure by more and increase their transition-aligned exposure, while banks with a high initial exposure to transition risk further increase their exposure to those sectors. We also find evidence supportive of outward international spillovers through banks' cross-border lending portfolios: banks increase transition risk-exposed lending to a given country if climate regulation gets tighter in other countries banks have such exposures to. |
| Keywords: | Transition risks;climate policy;large exposures;capital flows |
| JEL: | F42 G11 G21 G38 |
| Date: | 2025–10–31 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023271 |
| By: | Luis M. Viceira; Sally Shen |
| Abstract: | This paper examines optimal currency demands for global equity and bond investors in a large cross-section of developed and emerging markets over the 1975-2023 period. It extends the framework of Campbell et al. (2010) by incorporating both optimal portfolio-risk minimizing currency exposures, accounting for empirically measured hedging costs arising from deviations of Covered Interest Parity (CIP), and optimal expected-return-driven currency demands based on non-zero expected excess currency returns arising from empirically measured deviations of Uncovered Interest Parity (UIP). The analysis shows that the main conclusions of their portfolio risk-minimizing framework hold for this larger and longer panel of countries and that they are robust to deviations from CIP. Specifically, it is optimal for portfolio risk-minimizing equity investors to hold exposures to the U.S. dollar and the euro while avoiding exposure to all other currencies, whereas bond investors should hedge all currency exposures. In contrast, observed deviations from UIP are sufficiently large and persistent among currencies with high average relative interest currencies, especially Emerging Markets currencies, to generate expected return-driven currency demands that offset, and in some cases reverse, portfolio-risk minimizing demands, even for investors with low risk tolerance. The average excess returns on those currencies are large enough to compensate investors for their substantial return volatility and strong positive covariance with equity returns. |
| JEL: | F0 F21 F23 F3 F30 F31 F37 G0 G1 G11 G15 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35498 |
| By: | Otaviano Canuto; Diogo Ramos Coelho; Bruno Saraiva |
| Abstract: | Global imbalances are back—and this time the risks look different. The 2008 financial crisis showed how persistent current-account deficits and surpluses between major economies can fuel financial instability and trigger sudden, severe reversals of capital flows. After almost two decades, many thought that episode had been resolved. It had not. New imbalances have built up, with a familiar cast: China, Germany, Japan, and oil exporters running large surpluses, and the United States absorbing the rest of the world's savings. But the underlying dynamics have shifted in ways that make the current situation harder to read and potentially harder to unwind. This paper traces those shifts and asks whether the world is better or worse placed to manage them this time around. The situation today is not simply the result of trade imbalances or unfair competition. It reflects the structural role of the U.S. as the world's balance-sheet absorber of last resort—a country with assets that everyone wants to hold, regardless of what tariffs or exchange rates do. That role comes with new vulnerabilities: persistent global demand for dollar-denominated safe assets, soaring public U.S. debt, equity markets concentrated in a handful of technology firms, and a financial system increasingly reliant on non-bank intermediaries. Fixing this would require coordinated action involving fiscal adjustment in the United States, stronger domestic demand in China, and deeper financial integration in Europe. What is missing is the political will to act, at a moment when geopolitical fragmentation and strategic rivalry make international cooperation harder than ever. The 2008 crisis was not the last word on global imbalances. It may have been the rehearsal. |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:ocp:rpaeco:pp15_26 |
| By: | Andrea Vismara; Rafael Prieto-Curiel; Rosie Hayward |
| Abstract: | In 2025, bilateral foreign aid was reduced by 23%, affecting more than 130 aid recipient countries. We assess whether debt service relief or remittance increases can match the USD 26 billion in aid losses. Using a network-shock model calibrated to bilateral donors' individual cuts, we estimate recipient-country aid losses and evaluate compensation feasibility in terms of annual debt service payments that would need to be cancelled and remittance capacity (the headroom between flows and a theoretical maximum in which every working-age migrant sends funds) mobilised to financially offset them. We find that 18% external debt service relief and 10% of remittance mobilisation could compensate half of the affected countries. However, some countries remain locked out of either or both mechanisms. A fundamental trade-off in the global financial architecture emerged for large aid-cut losers: countries positioned to benefit from debt service relief lack large international diaspora networks (limiting their capacity to increase remittances), while those with established diaspora channels face structural exclusion of traditional debt markets, rendering debt service relief ineffective. These insights introduce nuance in how alternative finance sources can replace foreign aid. |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2608.21843 |
| By: | Thomas Drechsel (University of Maryland, NBER, CEPR); Michael McLeay (Bank of England); Silvana Tenreyro (London School of Economics); Enrico D Turri (London School of Economics) |
| Abstract: | We show that the optimal monetary policy and exchange rate framework depend critically on the economy’s commodity exposure. We develop a flexible but tractable model economy with commodity exports and imports, in which international financial conditions may vary with the commodity cycle, and we compute the welfare-optimal policy in the presence of price and wage rigidities. Stabilising domestic prices is welfare-optimal for commodity exporters, in line with standard open-economy policy prescriptions. But for economies that use commodities as inputs in production, optimal policy largely ‘looks through’ the direct and indirect effects of commodity shocks on domestic prices; this contrasts with some earlier findings and policy practice (which only ‘looks through’ the direct effect). In emerging and developing economies, where financial conditions are more tied to the commodity cycle, trade-offs are starker and implementing the optimal policy may be challenging, since it requires enough credibility to keep inflation expectations anchored amidst greater volatility in some nominal variables. |
| Keywords: | Monetary policy;exchange rates;inflation targeting;commodity prices;small open economy |
| JEL: | E31 E52 E58 F41 Q02 Q30 |
| Date: | 2026–06–05 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023308 |
| By: | Brigitte Hochmuth; Christian Merkl; Heiko Stüber |
| Abstract: | This paper studies how an unemployment-benefit reform in one member state of a monetary union affects savings, net foreign asset positions, and fiscal space across member states when households face incomplete insurance. Lower benefits reduce unemployment and increase fiscal space in the reforming country. Employed workers increase their precautionary savings to compensate for reduced public insurance. A portion of these savings is invested abroad, pushing the non-reforming country into a negative net foreign asset position and lowering its long-run consumption. Despite raising fiscal space and long-run average consumption in the reforming country, the reform may decrease ex-ante welfare because it reduces insurance and depresses consumption during the transition as households self-insure through higher savings. We discipline our proposed model with firm-level evidence on Germany’s post-reform tradable-sector expansion following the Hartz IV reform of unemployment benefits. In our simulation, this reform accounts for a substantial share of the observed post-reform open-economy adjustment, whereas the earlier wage moderation cannot explain most of the observed patterns. |
| Keywords: | unemployment insurance reform, spillover effects, precautionary savings |
| JEL: | E21 E24 F16 F41 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12934 |
| By: | Anusha Chari; Gian Maria Milesi Ferretti |
| Abstract: | This paper analyzes foreign demand for U.S. assets, with particular emphasis on U.S. Treasury securities. It documents compositional shifts in U.S. bilateral external positions across geographic regions and asset classes, providing estimates of creditor positions closer to a nationality-based concept. While rising U.S. equity prices explain a sizable share of the deterioration in the net external position, foreign purchases of U.S. Treasury securities have been the largest source of U.S. current account financing. The share of these securities held by foreign official investors has declined sharply during the past decade, while the share held by foreign private investors (especially through financial centers) has risen. The decline in foreign official holdings is well explained by lower reserve accumulation, increased Federal Reserve holdings, and dollar appreciation against other reserve currencies. The evidence is consistent with central banks rebalancing their portfolios to avoid large swings in currency shares. Geoeconomic fragmentation is negatively correlated with official demand for U.S. Treasuries, while foreign private demand remains sensitive to safe-haven dynamics. Overall, the paper assesses how these structural shifts affect portfolio preferences for U.S. assets and their potential implications for the U.S. external position amid heightened geopolitical and fiscal uncertainty. |
| JEL: | F21 F32 F34 G15 H60 H63 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35555 |
| By: | Wang, Maria |
| Abstract: | Abstract This paper studies how geoeconomic shocks affect bilateral trade, and what they imply for the position of a small open economy in global value chains. It combines monthly UN Comtrade imports at the 4-digit HS level for 2015–2024 with measures of import and export restrictions from the Global Trade Alert database and the country-level geopolitical risk index of Caldara and Iacoviello (2022). The estimation uses a two-stage structural gravity model: a first stage estimated by Poisson pseudo-maximum likelihood with reporter-partner-product, reporter-product-time and partner-product-time fixed effects, and a second stage relating the recovered multilateral resistance components to geopolitical risk. Direct policy restrictions carry the larger effect: an additional import restriction is associated with roughly 16 percent lower bilateral trade and an additional export restriction with roughly 3 percent. Geopolitical risk in the partner country is associated with a more moderate reduction, and the association is about forty percent larger on the subsample of structurally vulnerable products, defined by concentrated sourcing, reliance on non-EU suppliers, and limited substitutability. Such products account for a stable 28–30 percent of Finland’s goods imports over the period. |
| Keywords: | Geopolitical risk, Gravity model, Trade restrictions, Supply-chain vulnerability, Economic security, Finland |
| JEL: | F13 F14 F51 |
| Date: | 2026–08–26 |
| URL: | https://d.repec.org/n?u=RePEc:rif:wpaper:144 |
| By: | Jasmin E. Dacio (Bangko Sentral ng Pilipinas); Reizle Jade C. Platitas (Bangko Sentral ng Pilipinas); Sarah Jane A. Castañares (Bangko Sentral ng Pilipinas); Sanjeev A. Parmanand (Bangko Sentral ng Pilipinas) |
| Abstract: | This paper investigates whether the exchange rate pass-through (ERPT) to inflation varies with the direction and magnitude of change in the nominal exchange rate. Using non-linear and multiple threshold autoregressive distributive lag models, we reconsidered the premise of linearity and symmetry often assumed in the literature on ERPT. We found that in the case of the Philippines, the long-run ERPT is larger and statistically significant during depreciation episodes. Meanwhile, pass-through is limited during appreciation episodes, possibly reflecting the downward stickiness of prices. Further, ERPT tends to be higher at large enough depreciations while it remains limited even during large appreciations. After accounting for asymmetry, the results are consistent with previous studies establishing the decline of ERPT since the Bangko Sentral ng Pilipinas adopted an inflation-targeting framework in 2002. |
| JEL: | E31 E50 F31 F47 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:bhd:dpaper:202516 |
| By: | Michael D. Bordo; Cécile Bastidon |
| Abstract: | We propose stress tests based on an original International Monetary System (IMS) model with regime switchings. The model is calibrated for nine reference currencies from the beginning of the Classical Gold Standard to the present. Regime switchings in currency dominance are related to combinations of conditions on a multidimensional environment variable that includes five classes of shocks: technology; development; monetary, financial and fiscal institutions; democracy and conflicts; and the regulatory environment. We provide an original database of events for these five classes of shocks, which is used for calibration. The calibration highlights the important role of the democracy and conflicts component in regime switchings. The calibrated model is then used to perform stress tests on the current prospects of currency dominance for a broad set of scenarios. A salient result from the scenarios we tested is that the dominance of the US dollar is at most marginally affected. No other currency emerges as a major player, suggesting strong inertia in the system’s current centripetal dynamics. |
| JEL: | C3 C82 E42 F33 G15 N2 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35647 |
| By: | Kaltenbrunner, Annina; Maad, Magdalena; Mallmann, Fynn; Rehm, Miriam |
| Abstract: | This chapter builds on Robert Blecker's pathbreaking, decades-long contributions (Blecker 1989, 1998, 2013; Blecker and Razmi, 2008) which incorporate, among many other contributions, capital flows to the balance of payments constrained growth literature. We link this to the literature on wealth inequality, which is so far deficient with regard to foreign asset ownership by the Global South. Using empirical evidence from wealth surveys in selected Global South countries as well as macroeconomic data, we argue that the wealthiest groups in the Global South are likely the primary holders of international financial and investment assets, and capital flight by elites will be predominant in these countries. This tightens the balance of payments constraint both directly and through differential returns of the Global South and North. This supports Robert Blecker's argument that we need to consider how Global South economies' subordinate monetary and financial integration interacts with its balance of payments constraint stemming from current account dynamics. |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ifsowp:342452 |
| By: | Juan Manuel Rodriguez Repeti (IIEP-UBA); Danilo Trupkin (UDESA) |
| Abstract: | This paper documents how inventory dynamics vary across levels of development and how they respond to real and financial shocks. Using a balanced panel of 72 small open economies over 1993–2022, spanning advanced to low-income economies, we show that inventories are strongly procyclical in advanced economies but become acyclical at lower income levels, while volatility and persistence rise as development declines. Using local projections, we estimate inventory responses to a long-run productivity shock and to a financial shock identified from the spread between U.S. corporate bond yields and Treasury yields. Productivity shocks generate temporary inventory accumulation across all groups, with smoother adjustment in advanced economies and more irregular cycles in emerging and developing economies. Financial shocks trigger decumulation followed by a rebound in higher-income groups, but a delayed, unreversed decline in low-income economies. |
| Keywords: | Inventories; Business Cycles; Productivity Shocks; Financial Shocks; Local Projections; Emerging Economies |
| JEL: | E22 E32 E44 F41 C33 O11 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:aoz:wpaper:405 |
| By: | Valentin Burban; Pavel Diev; Gilles Dufrénot; Nelson Mongeaud |
| Abstract: | This paper proposes a new empirical taxonomy of safe assets based on their safe-haven behavior during periods of global risk aversion. Our multi-criteria framework captures the persistent performance of bond securities, currencies, and alternative assets during episodes of acute risk-off sentiment, allowing us to construct a cross-asset ranking of safe-haven behavior by asset characteristics: global safe assets, credit-sensitive assets, and emerging assets. We find that sovereign bonds issued by G10 economies, including U.S. Treasuries, consistently exhibit the strongest safe-haven behavior. A limited set of corporate bond markets displays partial safe-asset characteristics, while gold is the only alternative asset that consistently scores highly across our safe-haven criteria, particularly during periods of geopolitical risk. We further show that U.S. Treasuries have exhibited weaker safe-haven properties since the pandemic, although this reflects a broader reconfiguration of global safe-asset hedging properties rather than a uniquely U.S. decline. We find that weaker safe-haven properties are associated with higher inflation, debt levels and scarcity of available assets. |
| Keywords: | Safe Assets, Safe-Haven, U.S. Treasuries, Asset Pricing, Risk Aversion. |
| JEL: | F31 E44 G01 G12 G15 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:1049 |
| By: | Tarek Alexander Hassan; Thomas Mertens; Jingye Wang |
| Abstract: | We show that quantitative asset pricing models, built to address the equity premium and risk-free rate puzzles, systematically fail when applied to open economies: they cannot generate the large and persistent interest rate differentials we observe between risky and safe currencies. This failure stems from the key mechanism that produces their success in matching both closed-economy puzzles: In these models, the mean of the stochastic discount factor offsets its variance nearly one-for-one, which immobilizes interest rates --- so that differences in expected currency returns across countries must arise almost exclusively from predictable changes in exchange rates, at odds with the data. We prove this result in a broad class of models that allows for market incompleteness and exchange rate disconnect, requiring only that each country's risk-free asset is priced by investors who demand compensation for risk in line with observed risk premia. We argue this tension between canonical asset pricing and international macroeconomic models is a key reason researchers have struggled to reconcile the observed behavior of exchange rates, interest rates, and capital flows across countries. |
| JEL: | E43 F31 F4 G12 G15 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35572 |