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on Open Economy Macroeconomics |
| By: | Michael B. Devereux; Charles Engel; Steve Pak Yeung Wu |
| Abstract: | We construct a two-country New Keynesian model in which the U.S. enjoys an “exorbitant privilege” as its government bonds are desired by banks both in the U.S. and abroad as superior collateral. In times of global stress, the dollar appreciates since the demand for high quality collateral drives up the “convenience yield” earned by U.S. government bonds. There is “retrenchment” - each country reduces its holdings of foreign assets - a critical determinant of which is the endogenous response of prices and returns. The model can account for the observed exchange rate and external position behavior of the U.S. While the model incorporates only a small change from a workhorse New Keynesian model with segmented financial markets, it synthesizes and reconciles three major perspectives: on exorbitant privilege, global financial intermediation, and convenience yields. |
| Keywords: | exchange rates, financial frictions, liquidity, convenience yield, dollar dominance |
| JEL: | F3 F4 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_13008 |
| By: | Mr. Olivier J Blanchard; Mr. Daniel Leigh; Ms. Prachi Mishra |
| Abstract: | We look at the effects of debt and primary fiscal balances on sovereign credit ratings through the lens of a simple model. We find that the ratings differ from the implications of the model in three important ways. They give much more weight to debt relative to forecast primary balances. They understate the effects of the difference between the interest rate and the growth rate. They give a very large role to country effects. For the same level of debt and forecast primary balances, they imply extremely different ratings across countries, and imply extremely different levels of debt needed to reach a given rating. |
| Keywords: | Debt; deficits; ratings; forecasts |
| Date: | 2026–09–18 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/195 |
| By: | Fernando Toledo; Gabriel Montes-Rojas |
| Abstract: | This paper studies how geo-economic fragmentation affects the international allocation of capital in an economy where artificial intelligence (AI) relies on specialized, mobile investment. We develop a heterogeneous-agent open-economy model with AI-specific capital and geopolitical frictions in cross-border asset holdings. These frictions reduce capital mobility, raise the cost of AI adoption, and generate distributional effects across countries and households. The quantitative results show that fragmentation produces welfare losses that rise nonlinearly with geopolitical distance. These losses are larger for AI-lagging economies and for low-wealth households, mainly through reduced investment, weaker labor income, and tighter financial conditions. The paper also defines a so-called Fragmented-AI Trilemma: economies cannot simultaneously preserve monetary autonomy, maintain efficient AI-capital allocation, and insulate themselves from geopolitical shocks. |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2609.18976 |
| By: | Alice Albonico (University of Milano-Bicocca); Guido Ascari (University of Pavia, De Nederlandsche Bank, CEPR); Qazi Haque (Adelaide University); Kostas Mavromatis (De Nederlandsche Bank, University of Amsterdam); Andra Smadu (De Nederlandsche Bank) |
| Abstract: | We develop and estimate an open economy DSGE model for the euro area where global energy prices and the exchange rate jointly determine domestic inflation, because imported energy, priced in foreign currency, enters both consumption and production. Energy and exchange-rate disturbances account for the bulk of short-run volatility in headline euro area inflation, with energy price shocks driving most of the post-pandemic surge. Because energy and non-energy goods are poor substitutes, an adverse energy price shock raises import values, deteriorating the trade balance and depreciating the real exchange rate through the net-foreign-asset and UIP channels. The exchange-rate channel strengthens monetary transmission and improves the short-run inflation-output trade-off relative to a non-energy economy. Optimal policy can exploit this channel rather than looking through energy price shocks. The case for looking through such shocks becomes stronger when the central bank assigns a greater weight to output gap stabilization and prices become stickier. |
| Keywords: | Monetary policy; Inflation; Energy; Bayesian estimation |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:adl:wpaper:2026-07 |
| By: | Wenli Cheng |
| Abstract: | This paper extends the classical Ricardian model from a barter system to a monetary framework, integrating the pivotal role of banking in production and exchange. It uses transaction-flow matrices to dynamically trace financial flows among all market participants and compares the systemic outcomes under three distinct monetary architectures: (1) the Euro system with a common currency; (2) the Bancor system with a supranational currency; and (3) the Dollar system with a national reserve currency. While reaffirming the Ricardian gains from comparative-advantage-based specialization, the paper reveals how different monetary systems shape trade outcomes. The Euro and the Bancor systems do not inherently generate trade imbalances. In contrast, the Dollar system imposes an asymmetric demand for the reserve currency, which must be earned through net exports. Consequently, persistent trade imbalances are an intrinsic feature of the Dollar system. |
| Keywords: | Ricardian model, the Euro system, the Bancor system, the Dollar system |
| JEL: | F10 F33 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:pke:wpaper:pkwp2620 |
| By: | Pablo Aguilar (European Central Bank); Matthieu Darracq Pariès (European Central Bank); Alistair Dieppe (European Central Bank); Rubén Domínguez-Díaz (Banco de España); Antonio Eugenelo (University of Oxford); José-Elías Gallegos (Banco de España); Javier Quintana (Banco de España) |
| Abstract: | We study the short-run macroeconomic transmission of a US-China tariff war in an open economy multi-sector New Keynesian model with input-output linkages, sectoral nominal rigidities and heterogeneous currency invoicing. A reciprocal 10 percentage point tariff increase generates asymmetric incidence: the tariff-imposing country bears more of the inflationary burden, while the targeted country experiences the larger output contraction. Production networks amplify this contraction by propagating the shock beyond the directly tariffed bilateral margin. Currency invoicing further shapes transmission. Under heterogeneous invoicing, dollar-denominated border prices weaken the expenditure-switching role of exchange rates, deepening the contraction in China relative to producer-currency pricing and altering third-country spillovers. The euro area response is small in the aggregate, but only because positive trade-diversion margins are offset by weaker demand from China and multilateral adjustments. We then exploit the model’s sectoral structure by imposing tariffs on one Chinese sector at a time. Sectoral incidence is highly concentrated, but aggregate effects cannot be inferred from the directly tariffed sector alone: domestic propagation offsets own-sector gains in the United States, reinforces own-sector losses in China and leaves the euro area as a net object shaped by opposing trade margins. The results show that tariff incidence depends jointly on where the tariff lands, how the shock propagates through production networks and how invoicing governs border-price adjustment. A framework that combines these margins delivers a materially different assessment from one built on bilateral trade shares alone. |
| Keywords: | tariffs, trade, dynamic stochastic general equilibrium, multicountry, networks, dominant currency pricing |
| JEL: | E31 E32 E52 F13 F41 F42 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2632e |
| By: | Pol Antràs; Adrian Kulesza; Andrea F. Presbitero |
| Abstract: | We study how the U.S.-China trade war has reshaped global trade patterns, creating significant spillovers to third countries. Using recent tariff policy changes and monthly international trade flow data, we document a redirection of Chinese exports away from the U.S. market and toward third countries. To interpret the impact of these reallocations on third countries, we introduce a taxonomy that separates four exposure margins - export competition, import competition, consumer gains, and sourcing gains - and construct theoretically-derived indices that map countries into these channels. Recent work often proxies such exposure with trade-basket similarity. We show why this can be problematic: similarity measures are symmetric and omit the size of product-specific shocks, Chinese market penetration, substitution elasticities, and incidence weights. Our model-based indices therefore generate country rankings that differ substantially from conventional similarity measures. |
| JEL: | F1 F2 F4 F6 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35785 |
| By: | Lucas ter Steege (Deutsche Bundesbank); Sofia Velasco (Banco de España) |
| Abstract: | This paper studies the financial-market transmission of the April 2025 U.S. tariff announcements, with a particular focus on the unusual combination of dollar depreciation and rising long-term U.S. Treasury yields. We ask whether the market reaction can be understood as the propagation of a single tariff-announcement shock or whether it instead reflects the interaction of distinct macro-financial disturbances. To address this question, we exploit time variation in the volatility and excess kurtosis of structural shocks to recover macro-financial forces without imposing event-based restrictions or exclusion assumptions. Our results show that the initial market reaction is consistent with a conventional safe-haven shock, but this mechanism cannot account for the subsequent joint behaviour of exchange rates and long-term U.S. Treasury yields. Instead, different segments of financial markets are dominated by distinct orthogonal shocks associated with safe-haven demand, confidence in U.S. institutions, Treasury-market intermediation and changes in the convenience value of dollar-denominated safe assets. |
| Keywords: | exchange rates, Treasury yields, risk premia, trade policy shocks, safe-haven dynamics, heteroskedastic identification, financial spillovers |
| JEL: | F31 F41 G14 E44 C32 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2629e |
| By: | João Tovar Jalles (University of Lisbon-Lisbon School of Economics and Management (ISEG)); John Beirne (Asian Development Bank); Donghyun Park (The South East Asian Central Banks (SEACEN) Research and Training Centre) |
| Abstract: | This paper examines how institutional, fiscal, and external conditions shape monetary transmission in 40 economies over 1991–2022. Using forecast-based policy innovations and local projections, we estimate cumulative CPI price-level and real GDP responses. On average, monetary tightening produces a positive but imprecise price response and a modest, delayed output contraction. Heterogeneity is more pronounced for activity than for prices: GDP declines most clearly in flexible-regime emerging markets, whereas regime differences in price responses are generally weak. In joint moderator models, financial openness retains the clearest association with CPI responses, while emerging-market status and public debt matter most for GDP. Controlling for global risk through a shock–VIX interaction leaves these results essentially unchanged. No principal estimate yields a sufficiently precise price decline, precluding meaningful sacrifice ratios. The findings point to overlapping institutional and external influences rather than a single dominant transmission mechanism. |
| Keywords: | Monetary policy transmission, inflation dynamics, exchange rate regimes, central bank independence, financial openness, external buffers, global financial cycle, local projections, cross-country heterogeneity |
| JEL: | E52 E58 F41 F42 C23 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:sea:wpaper:wp65 |
| By: | Guillaume Bazot (Aix Marseille Univ, CNRS, AMSE, Marseille, France); Eric Monnet (Paris School of Economics); Matthias Morys (University of York [York, UK]) |
| Abstract: | The origins of modern financial globalization are often traced to the emergence of the Eurodollar market in the 1960s, but its implications for monetary policy under Bretton Woods remain unclear. This paper revisits international monetary transmission between 1948 and 1971 using a new monthly series of exogenous U.S. monetary policy shocks based on unanticipated daily changes in the Fed discount rate. We show that U.S. monetary tightening strongly affected U.S. inflation, output, and unemployment, while attracting capital inflows primarily through borrowing Eurodollars from the foreign branches of U.S. banks. After the restoration of current account convertibility in 1958, U.S. monetary shocks also increased Eurodollar and foreign interest rates, pointing to growing international financial integration. However, they had no significant effects on foreign output or credit, suggesting that domestic financial regulation and market segmentation continued to insulate Japanese and European economies from international shocks despite the expansion of offshore dollar markets. |
| Keywords: | US monetary policy shocks; International monetary transmission; Trilemma; Financial globalization; Capital controls; Eurodollar market; Bretton Woods system |
| JEL: | E44 E52 F33 F36 F42 N10 N20 |
| Date: | 2026–09–01 |
| URL: | https://d.repec.org/n?u=RePEc:aim:wpaimx:2625 |
| By: | Illenin O. Kondo; César Sosa-Padilla; Zachary J. Swaziek |
| Abstract: | China's rise as a major lender to emerging economies since the early 2000s has introduced a unique form of lender power: borrowers cannot default on the subsidized loans they receive, but may still face sudden rollover demands outside their control. We argue this distinctive structure—bilateral rollover risk without default risk—disciplines recipient countries' borrowing on international markets. In a quantitative long-term sovereign debt model, we show that such rollover-prone nondefaultable Chinese loans expose market debt to dilution risk: governments may need to tap international lenders when repayment to China comes due, and therefore choose to deleverage from private markets when Chinese inflows arrive. Market debt and bond yield dynamics in the data are consistent with this “disciplining effect.” We then use the model to study two geopolitical scenarios: a bloc-formation exercise in which China offers take-it-or-leave-it loans to induce the borrower's exit from international debt markets, and an optimal exposure-to-China problem under the risk of a permanent and sudden retrenchment of Chinese funding. Together, these results show how official finance à la China can simultaneously improve market borrowing conditions and become a new destabilizing force to the global sovereign debt architecture as geopolitical alliances shift. |
| JEL: | F34 F41 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35767 |
| By: | Ece Ozge Emeksiz; Andres Fernandez; Nikhil Patel; Ivan Petrella; Tatjana Schulze |
| Abstract: | Exchange rate movements in emerging market and developing economies (EMDEs) can reflect shifts in macroeconomic fundamentals or, alternatively, financial shocks that impair currency market functioning. Distinguishing between these fundamental and non‑fundamental drivers is central to the IMF’s Integrated Policy Framework (IPF) and to assessing when foreign exchange (FX) intervention may be appropriate to smooth currency risk premia. This Staff Discussion Note develops an empirical framework to distinguish between these two types of drivers using deviations from uncovered interest parity (UIP), which capture currency risk premia and limits to arbitrage. Using 15 years of monthly data from 25 EMDEs, the paper documents stylized facts on UIP premia and introduces a toolkit that combines macro‑financial data, model‑based sign restrictions, and narrative evidence to identify episodes in which exchange rate movements are driven by financial shocks rather than fundamentals. Applications to Chile and Brazil show that such financial shock driven episodes account for around one third of UIP premium fluctuations—but are associated with sizable contractions in economic activity. The framework can be applied both retrospectively and in real time, providing policymakers with a structured approach to interpreting exchange rate pressures. |
| Keywords: | exchange rates; financial shocks; uncovered interest parity; narrative VARs |
| Date: | 2026–09–17 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfsdn:2026/003 |