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on Open Economy Macroeconomics |
| By: | John Sturm Becko; Arnaud Costinot |
| Abstract: | We study international cooperation in a general environment with pecuniary and non-pecuniary externalities across countries. We derive two main theorems, each demonstrating that market-access commitments, a form of shallow integration, are sufficient to implement globally efficient policies. When all cross-border externalities are pecuniary, the first theorem provides a new and unifying perspective on a series of results by Bagwell and Staiger. When some cross-border externalities are non-pecuniary, the second theorem shows that market-access commitments, properly extended, still sustain global efficiency. These extended market-access commitments reinterpret cross-border externalities as additional goods that are traded and priced at their social values. We discuss the implications for international cooperation on climate change and geopolitics. |
| JEL: | F10 F11 F12 F13 F15 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35685 |
| By: | Ludovica Ambrosino (London Business School); Jenny Chan (Bank of England); Silvana Tenreyro (London School of Economics) |
| Abstract: | How does higher productivity affect inflation? Productivity shifts both supply and demand (through real incomes), and its effect on inflation depends on their relative magnitude and timing, as well as on the monetary policy response. We distinguish between a one-off level shock that increases productivity temporarily (relative to trend) and a persistent rise in productivity growth. A one-off, temporary increase in productivity lowers marginal costs and raises potential output, generating downward pressure on the price level. Once prices adjust however, inflation returns to target. By contrast, higher productivity growth raises expected permanent income and stimulates investment and consumption, increasing the natural real rate. Absent a tightening of monetary policy, inflationary pressures may emerge. Anticipation effects are central: if demand rises ahead of realised supply gains, inflation can increase despite higher productive capacity. In an open economy, the sectoral incidence of the shock also determines the impact on inflation. In summary, the inflationary consequences of productivity gains are a priori ambiguous and depend on the balance and timing of demand and supply responses, the composition of demand, and crucially, the monetary policy response. |
| Keywords: | Monetary policy;productivity;inflation;natural rate of interest |
| JEL: | E3 E4 E5 F4 O4 |
| Date: | 2026–08–21 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023542 |
| By: | Ozge Akinci; Ṣebnem Kalemli-Özcan |
| Abstract: | We study how increased uncertainty about U.S. asset returns affects global asset prices and exchange rates in a two-country model with intermediary balance-sheet constraints. Empirically, uncertainty shocks widen global credit spreads, appreciate the dollar, and increase currency risk premia. In our model, higher uncertainty tightens intermediary constraints and lowers asset prices, reversing the counterfactual asset price increase in frictionless models. Because constraints make net worth especially valuable in bad times, risk premia respond strongly to uncertainty shocks. This interaction allows the model to match the credit spread, currency premium, and dollar responses in the data. |
| Keywords: | financial frictions; time-varying uncertainty; intermediary asset pricing |
| JEL: | E32 E44 F41 |
| Date: | 2026–08–31 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:103716 |
| By: | Benedikt Ballensiefen; Fabricius Somogyi; Hannah L Winterberg |
| Abstract: | We study the determinants of US dollar demand across market participants and traded instruments using survey-based exchange rate and macroeconomic expectations. To empirically establish the relevance of survey-based expectations for currency flows, we leverage granular foreign exchange trading data and present three main findings. First, end-user investors increase their dollar purchases when they expect the US dollar to appreciate. Investment funds and non-dealer banks adjust their synthetic dollar borrowing in the FX swap market in response to forecasted changes in synthetic dollar funding costs. Second, cross-sectionally, investors rebalance along the factor structure of currency risk into dollars following an expected dollar appreciation. Third, the predictive power of survey forecasts weakens when forecaster disagreement or uncertainty rises. Overall, our findings show that long-horizon expectations predict dollar demand across spot, forward, and swap currency markets. |
| Keywords: | Exchange rate expectations; dollar demand; currency flows; FX swaps; survey forecasts |
| Date: | 2026–09–04 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/186 |
| By: | Linda S. Goldberg; Oliver Zain Hannaoui; Sneha Parthasarathy |
| Abstract: | The dollar’s share of global official foreign exchange reserves fell from 64 percent in 2015 to 56 percent in 2025. This downward trajectory is sometimes read as evidence that the dollar’s role in international financial markets is eroding. However, aggregate statistics obscure the composition of changes occurring at the country level. In this post, we show that the aggregate decline is not a systematic global shift away from dollar assets. Rather, the aggregate decline reflects the actions of a handful of large reserve holders, changing either their currency preferences or the size of their reserve portfolio. From the perspective of the cross section of countries holding dollar assets, the dollar’s status in official portfolios is largely intact. |
| Keywords: | global foreign exchange reserves; global reserves; dollar status; Global FX reserves |
| JEL: | F3 F5 |
| Date: | 2026–09–02 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:103729 |
| By: | Alexei Miksjuk; Yipei Zhang |
| Abstract: | As low-income countries (LICs) gain access to international capital markets, the scope for increased financing rises but so does the risk of shocks. Our empirical results suggest that, after the global financial crisis (GFC), the global financial cycle has been a significant driver of private capital flows to LICs. In particular, a stronger US dollar (against advanced economy currencies) was associated with weaker net inflows. We also find that external government borrowing in LICs had a statistically significant but relatively small counter-cyclical component, inversely related to global financial and economic cycles, complementing policy responses to shocks. |
| Keywords: | capital flows; external borrowing; global financial cycle; government loans; low-income countries |
| Date: | 2026–08–28 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/179 |
| By: | Drishan Banerjee; Galina Hale; Harrison Shieh |
| Abstract: | Post-pandemic inflation raised fears that U.S. monetary tightening would trigger a repeat of the 1982 sudden stop in capital flows to emerging economies. Yet as of 2026 no global recession has followed. We establish three stylized facts distinguishing the 1980s from the 2020s, beyond the shift to flexible exchange rates: monetary policy effectiveness, fiscal space, and external vulnerabilities. We rationalize them in a Mundell-Fleming framework with a fiscal space constraint, which predicts a central role for fiscal space in transmitting foreign currency risk-free rate increases. Cross-country evidence confirms that fiscal space shapes economic performance post-tightening. |
| JEL: | F34 F42 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35673 |
| By: | Zhengyang Jiang |
| Abstract: | Does financial opening necessarily lead to currency internationalization? To study the competition between incumbent and rising powers under financial interdependence, we develop a model of asset demand with microfounded network effects. Search frictions with currency-specialized intermediaries generate distinct notions of liquidity at asset-market and currency-area levels, which jointly shape the trajectory of currency competition. In the U.S.-China context, China at early stages of financial development benefits from pooling its assets with the dollar area, which reinforces the status quo. As China's financial markets deepen, RMB issuance allows China to internalize network effects and erode the dollar's dominance, triggering a discrete shift toward fragmentation. This transition is further shaped by sanctions, financial repression, and third-country responses, highlighting how financial interdependence transforms cooperation into rivalry in the evolution of the international financial order. |
| JEL: | E42 F34 G15 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35541 |
| By: | Qing Liu; Zanhui Liu; Vivian Zhanwei Yue |
| Abstract: | Official lending is large, senior, and countercyclical, continuing after sovereigns fall into arrears on private debt. We ask why sovereign finance exhibits this division of labor across creditors. In a production economy where a risk-averse sovereign privately allocates imported inputs, commitment is limited on both sides, and monitoring generates a noisy signal, the constrained-optimal allocation is decentralized by defaultable private debt, senior non-defaultable multilateral debt, and concessional bilateral debt whose relief is tied to the signal. Production remains distorted, but the sovereign is never excluded: official lending is monitored liquidity provision. A calibration reproduces procyclical private and countercyclical official debt. |
| JEL: | F21 F32 F34 F41 F44 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35667 |
| By: | Mr. Suman S Basu; Pablo Winant |
| Abstract: | We propose a tractable small-open-economy model in which uncovered interest parity premia on foreign exchange (FX) markets arise from the endogenous lack of insurability of exchange rate risks. Asymmetric information about monetary policy can make the tails of the exchange rate distribution uninsurable in FX hedging markets, which in turn generates premia in FX spot markets because of the risk aversion of lenders holding the external debt. There is a role for government intervention because of an information sensitivity externality: agents do not internalize that their actions can reduce the insurability of exchange rates. The model predicts that premia may be amplified by weaknesses in monetary, fiscal, and financial policy frameworks, and can be reduced through reforms which reduce the sensitivity of exchange rates to private information. The constrained efficient policy depends on the composition of external lenders and may include delegation of monetary policy to an “aloof central banker”, constraints on fiscal policy, more active use of macroprudential tools, and institutions which limit asymmetric information. |
| Keywords: | foreign exchange market; asymmetric information; monetary policy; fiscal policy; macroprudential policies |
| Date: | 2026–09–04 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/188 |
| By: | Adam Jakubik; Effie Karfaki; Tobias Krahnke; Wenjie Li; Ms. Anita Tuladhar; Chenyu Xu |
| Abstract: | Models of external balances rely on economic fundamentals, structural indicators, cyclical variables, and policy factors. However, existing models may not fully capture the effects of restrictions on trade payments and capital controls. In this paper, we include two new policy variables in a standard empirical model of the current account to address this gap: the Measure of Aggregate Trade Restrictions (MATR) and the FinOpen index. The results indicate that tighter restrictions on trade payments of one standard deviation are associated with increases in the current account balance of about one percentage point and an appreciation of the real effective exchange rate (REER). These effects primarily operate through suppressing import demand and reducing domestic absorption. Tightening capital inflow restrictions by one standard deviation increases the current account balance by about 1.4 percentage points and depreciates the REER. Outflow restrictions operate in the opposite direction. These effects are primarily due to a wedge between domestic and global real interest rates, which in turn affect saving and investment decisions. Updating these models to assess how trade payment and capital controls affect current account balances helps support more actionable policy recommendations. |
| Keywords: | Capital Controls; Trade payment restrictions; Current account balance; Real effective exchange rate (REER); External imbalances |
| Date: | 2026–09–04 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/187 |
| By: | Pablo D. Azar; Maryam Farboodi; Nish Sinha |
| Abstract: | We study how stablecoins impact global capital flows by constructing a novel wallet-level dataset linking geotagged Ethereum Name Service registrations to stablecoin transactions around banking restrictions, currency crises, sanctions, and monetary disruptions. We find that crisis-country wallets experience significant increases in USD stablecoin inflows and receipt activity during crisis weeks. Motivated by this evidence, we develop a small-open-economy New Keynesian model in which household adoption of programmable stablecoins weakens the government’s enforcement technology for capital controls by making capital mobility endogenous. The empirical evidence validates the model’s central assumption that flight pressure increases stablecoin adoption. Stablecoins therefore tighten the Mundell–Fleming trilemma by reducing the government’s ability to sustain independent monetary policy under a fixed exchange-rate regime. |
| Keywords: | Mundell–Fleming trilemma; capital controls; blockchain; stablecoins; financial infrastructure |
| JEL: | F32 F33 F38 E58 G28 |
| Date: | 2026–08–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:103702 |
| By: | Kai Arvai; Nuno Coimbra; Marco Pinchetti |
| Abstract: | This paper investigates the determinants of international investors’ portfolio choices between gold and sovereign bonds in an environment shaped by economic and geopolitical shocks. We develop an endogenous portfolio choice model where reserve safety has a political dimension — sovereign bonds issued by the dominant reserve country are more liquid but exposed to the issuer’s sanctions authority, while gold offers sanctions protection at the cost of lower liquidity. Our model implies that US convenience yields fall during periods of high sanction risk, as safe-asset demand fragments along geopolitical lines. Empirically, periods of elevated geopolitical risk coincide with higher gold prices and 10-year Treasury yields. In such periods, the average composition of official reserves shifts toward gold, with countries less aligned with the US increasing their holdings to a greater extent. |
| JEL: | E41 F02 F33 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35669 |
| By: | Kapanadze, Ketevani (European Research University (ERUNI)); Pytlikova, Mariola (CERGE-EI; MUNI Brno) |
| Abstract: | In response to COVID-19, Schengen countries temporarily reintroduced internal border controls, disrupting cross-border integration. Using this policy change as a natural experiment and monthly nighttime lights data, we estimate the short-run effects on European municipalities. Municipalities along internal Schengen borders experienced a 3–4% decline in economic activity relative to interior municipalities, with larger estimated effects when external-border municipalities form the comparison group. Losses were greater in smaller and less densely populated municipalities and along economically asymmetric East–West borders, whereas municipalities along more economically similar borders generally experienced smaller declines. The effects also depended on the pre-pandemic purpose of cross-border mobility: higher shares of work- and business-related travel, services, and shopping were associated with larger losses, while the results for leisure and social mobility are consistent with greater scope for domestic reallocation of activity. Overall, the findings show that the local consequences of internal border closures depend on municipality characteristics, cross-border economic asymmetries, and the purpose of mobility. |
| Keywords: | border closures, cross-border mobility, Schengen area, nighttime lights, local economic activity, border regions, COVID-19, European integration |
| JEL: | R11 R12 R23 F15 F22 C21 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18878 |
| By: | Mateo Agustín Fernández (Department of Economics, Universidad de San Andrés) |
| Abstract: | This thesis studies how reserve accumulation stance shapes debt dynamics in emerging economies, using global financial shocks as a plausibly exogenous source of variation in external borrowing conditions. Using a quarterly panel of 38 emerging markets over 2000Q1–2023Q4, I classify reserve stance into Under, Adequate, and Over regimes based on the IMF’s Assessing Reserve Adequacy metric and exploit the Excess Bond Premium as a global risk shock. The empirical analysis combines state-dependent local projections, LP–2SLS specifications, and a sensitivity-based proxy approach. The reduced-form results show that reserve stance shapes the pass-through of global shocks to sovereign spreads: under-accumulation amplifies the spread response, whereas over-accumulation dampens it. The LP–2SLS estimates show that the short-run semi-elasticity of external debt to spreads is positive in the Adequate regime, with a positive Over-accumulation differential, indicating that attenuated pass-through to spreads is associated with stronger transmission to external debt. The sensitivity-based approach further shows that, in the benchmark exercise, countries whose spreads are more sensitive to the common shock exhibit more muted debt responses. However, once within-state heterogeneity is allowed, countries with higher spread sensitivity exhibit stronger debt responses in the Under and Adequate regimes, whereas in the Over regime the relationship turns negative. These results suggest that reserve accumulation affects debt dynamics by altering both the transmission of global shocks to borrowing costs and the subsequent debt adjustment. An extension to additional macroeconomic outcomes shows that reserve stance affects the composition of macroeconomic adjustment: the Over regime is associated with a substantially smaller depreciation and a more muted trade-balance adjustment, but also with a larger short-run contraction in real activity and a higher medium-horizon price-level response. |
| Keywords: | international reserves, sovereign spreads, external debt, local projections, emerging markets |
| JEL: | E44 F34 F41 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:sad:ypaper:23 |
| By: | Kazuhiro Hiraki; Meryem Rhouzlane |
| Abstract: | A key objective of exchange rate pegs is to achieve price stability by stabilizing the value of the currency. However, the effectiveness of an exchange rate peg as a nominal anchor crucially depends on its operational design. This note provides guidance on how different exchange rate peg arrangements—such as bilateral exchange rate pegs, pegs to a basket of currencies, crawling pegs, and currency bands—can be effectively implemented. Specifically, the note focuses on operational considerations relevant to ensuring long-run price stability, such as choosing an appropriate anchor currency, setting the rate of crawl, and designing bands. The note also discusses how to conduct monetary and foreign exchange operations consistent with the chosen exchange rate peg arrangement. |
| Keywords: | nominal anchor; exchange rate peg; crawling peg; basket peg; band; uncovered interest rate parity |
| Date: | 2026–08–28 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfhtn:2026/006 |
| By: | Ryan Kim; Bin Ni; Hyunseung Oh; Choongryul Yang |
| Abstract: | We study an income-account channel of exchange-rate transmission using matched data on Japanese multinational parents and their foreign affiliates. During the sharp yen depreciation of 2021–22, we find that (i) foreign affiliates with greater exchange-rate exposure expanded their activity and generated more profits, with larger payments to their Japanese parents, and (ii) more exposed parents increased their average wages and shifted employment toward commercial branches and offices involved in sales, purchasing, and related business functions, with offsetting declines in other employment. A multinational firm model in which scarce parent-side support inputs are allocated between domestic operations and foreign affiliates rationalizes these findings. To study the aggregate implications, we embed this mechanism in a two-country general-equilibrium model with trade and multinational production. The model shows that moving foreign-market activity from exports to affiliate production reduces the domestic real GDP response to depreciation and shifts more of the external adjustment from trade and toward income earned abroad. Depreciation therefore need not generate a large expansion in domestic production. |
| Keywords: | exchange rates; multinational firms; current account; Japan |
| JEL: | F31 F23 F32 F41 |
| Date: | 2026–09–04 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:103753 |
| By: | Erin P. Gibson; Christopher L. House; Christian Proebsting; Linda L. Tesar |
| Abstract: | Unemployment rates are substantially higher and more volatile in the euro area relative to the United States. We ask to what extent the lack of cross-country labor mobility can account for unemployment dynamics in Europe. Our analytical model incorporates downward nominal wage rigidity and an endogenous migration decision. Firms are unable to freely adjust wages during economic contractions, generating an asymmetric distribution of unemployment over the business cycle. The model is calibrated to the dynamics of unemployment and net migration in a typical euro area country. An increase in labor mobility to that observed in the United States and holding all other parameters fixed would reduce the volatility of euro area unemployment by 28% and return over 1, 000, 000 unemployed to the workforce. The welfare cost to a typical euro area country of the currency union is 4.1 percent of permanent consumption; increasing labor mobility reduces this cost to about 3.55 percent. |
| JEL: | F22 F41 F45 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35668 |
| By: | Hippolyte W. Balima; Colombe Ladreit; Andresa Helena Lagerborg; Mr. Flavien Moreau; Mr. Andrea F Presbitero; Evgenia Weaver |
| Abstract: | This paper studies the macroeconomic dynamics of conflicts and post-conflict recovery using a newly assembled global dataset covering 194 countries, including 170 conflict onsets and 158 conflict terminations, over the period 1946–2024. Using a local-projection difference-in-differences framework complemented by geocoded firm-level evidence, we trace the evolution of macroeconomic aggregates around conflict onset and termination. We make four contributions. First, output losses from conflicts typically exceed those associated with banking, currency, and sovereign debt crises, as well as severe natural disasters. Second, external-sector dynamics constitute a central mechanism through which wars amplify macroeconomic challenges, despite policymakers’ efforts to contain the war shock. Third, post-conflict recoveries are slow and uneven and depend critically on the durability of peace: conflict resumption stalls recovery prospects, while sustained peace produces only gradual recoveries relative to wartime losses. These recoveries are typically labor-led, while capital accumulation and productivity remain subdued. Fourth, firm-level evidence confirms this labor-led recovery and points to persistent financial constraints that hinder capital rebuilding during the postconflict period. |
| Keywords: | wars; macroeconomy; macroeconomic policy; economic recovery |
| Date: | 2026–09–04 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/189 |
| By: | Stephanie Schmitt-Grohé; Martín Uribe |
| Abstract: | This paper studies the joint behavior over time of the mean and dispersion of U.S. import tariff rates across goods at the HTS 6-digit level, as well as the macroeconomic consequences of the shocks that drive these two moments. We document that the cross-sectional mean and the cross-sectional dispersion of import tariffs move closely together over time. Using a state-space model, we find that both are driven primarily by common shocks, while mean- and dispersion-specific tariff shocks play a negligible role. Thus, effectively, there are no separate mean-tariff shocks or tariff-dispersion shocks; there are only mean-dispersion tariff shocks. These common shocks account for a sizable share of movements in imports and the trade balance but only a small fraction of movements in output. A positive transitory mean-dispersion tariff shock reduces the import-to-output ratio and improves the trade-balance-to-output ratio; a positive permanent mean-dispersion tariff shock also reduces the import-to-output ratio but has a muted effect on the trade-balance-to-output ratio. Positive transitory mean-dispersion tariff shocks are expansionary, whereas positive permanent mean-dispersion tariff shocks are contractionary in the short run and expansionary in the medium run. |
| JEL: | E31 E32 F13 F41 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35661 |
| By: | Alberto Pavia; Christian Proebsting |
| Abstract: | The United States is a currency union where multiple risk-sharing mechanisms--- migration, fiscal transfers, income diversification and credit markets---buffer consumption from local income fluctuations. We show that risk sharing not only directly smooths consumption but also indirectly stabilizes income by dampening the local multiplier. Combining causal estimates from regional military buildups with a multi-region quantitative model, we find that current levels of risk-sharing cut state-level consumption volatility by a factor of four. Crucially, the indirect stabilization of income accounts for nearly half of this effect, implying substantially larger benefits from integration than conventional measures suggest. |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2608.04977 |