|
on Open Economy Macroeconomics |
| By: | Oleg Itskhoki; Dmitry Mukhin |
| Abstract: | What is the optimal macroeconomic tariff when trade is imbalanced and the policy objectives go beyond social welfare and also include fiscal revenues, increasing the number of manufacturing jobs, and closing a trade deficit? We study these questions in an environment which allows for long-run bilateral and aggregate trade deficits that reflect the country’s net foreign asset position and differential returns on foreign assets and liabilities (the “exorbitant privilege”). Only in special cases does the optimal tariff emerge as an increasing function of a trade deficit and for reasons unrelated to trade competitiveness. Instead, the planner trades off the conventional benefits of improved terms of trade with the costs from negative valuation effects on the country’s gross financial position. In our model calibrated to the United States, its large external dollar liabilities reduce the optimal tariff three-fold, from 34% to 9%, and act as an effective hedge for its trade partners against a trade war. In contrast to the expenditure switching logic and Lerner symmetry, closing the trade imbalance calls for an appreciation of the dollar to a level that depends solely on the US external financial position, and not on trade shares or trade elasticities, and can be achieved by means of an import tariff or an export subsidy. Alternatively, financial and trade rebalancing may happen if a tariff war results in the loss of privilege and the associated dollar depreciation. |
| JEL: | F13 F31 F4 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33839 |
| By: | Stéphane Auray; Michael B. Devereux; Aurélien Eyquem |
| Abstract: | We quantify the macroeconomic effects of the tariff measures announced (but not entirely implemented yet) on Liberation Day (April 2nd, 2025) through the lens of a New-Keynesian two-country model calibrated to the US and the rest of the world. We study both a unilateral 10pp tariff increase and a global trade war scenario with retalia- tory tariffs of a similar magnitude. In either case, tariffs are always sharply contractionary for US GDP, increasing inflation and widening the trade deficit. Measured in welfare terms a unilateral tariff generates gains for the US due to a large terms of trade appreciation, but these US welfare gains vanish with global retaliation. Three features of the model are critical in the evaluation of the tariff impact - the asymmetry in size and openness between the US and the rest of the world, the endogenous response of monetary policy to the inflationary effects of tariffs, and the importance of trade in intermediate goods for the scale of the global response to a tariff shock. |
| JEL: | F30 F40 F41 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33739 |
| By: | Mark A. Aguiar; Manuel Amador; Doireann Fitzgerald |
| Abstract: | This note addresses whether and when a trade war that imposes balanced trade (or even zero trade) can be consistent with initial non-zero net foreign asset positions. Using a bilateral trade model, we exploit insights from the classic literature on the Transfer Problem to characterize when gross asset or liability positions and tariff policies generate an endogenous terms-of-trade effect that ensures the value of assets and liabilities balance. As long as gross positions denominated in different goods differ in sign, there exists a continuum of bilateral tariff policies that ensure balanced trade and that satisfy the contractual financial obligations. If the new terms-of-trade do not reverse the initial direction of trade, balanced trade is consistent with non-zero exports and imports. In general, high enough bilateral tariffs lead to an autarkic outcome where no trade occurs and the net foreign asset positions rebalance to zero. |
| JEL: | F1 F13 F30 F32 F40 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33743 |
| By: | Junko Shimizu; Uraku Yoshimoto; Takatoshi Ito; Kiyotaka Sato; Yushi Yoshida; Taiyo Yoshimi |
| Abstract: | As a successful competitive research bid to use Japanese customs data, this study calculates the share of trade denomination currency (invoice currency) in Japan's exports and imports by industry and country from individual export and import documents. The results clarify the characteristics of invoice currency choice. The invoice currency share data by industry and country, compiled from customs data, shows each industry's characteristics by country. We confirm that the industry sector of the traded goods plays a role in the choice of invoice currency shares. In addition, we found that invoice currency shares in some industries varied significantly over the sample period from 2014 to 2022. This indicates that heightened geopolitical risks and supply chain restructuring in recent years may affect the choice of invoice currency. We have confirmed a large gap between the average (vs. world) share and the share by individual industry and country. Time-series changes are also remarkable. Our data indicates that the invoice currency shares aggregated in trade with the world do not necessarily reflect changes in invoice currency shares or the actual use of partner country currencies. |
| JEL: | F23 F31 F33 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33826 |
| By: | Ryuichiro Izumi; Weng Fei Leong; Balázs Zélity (Department of Economics, Wesleyan University) |
| Abstract: | Capital controls are often discussed as a potential tool to stabilize macroeconomic fluctuations. However, empirical studies typically find that their use does not systematically respond to the business cycle. This paper revisits the cyclicality of capital inflow controls by considering two possibilities: governments may respond only when output deviations become sufficiently large, and their responses may vary with the underlying macroeconomic policy stance. Using quarterly panel data for 45 advanced and emerging economies from 2000 to 2015, we find that inflow controls are employed countercyclically, but only in response to large output fluctuations. Moreover, the propensity to tighten inflow controls during booms is significantly amplified in countries that pursue more countercyclical fiscal and monetary policies. These findings help reconcile the gap between theoretical expectations and existing empirical findings, suggesting the importance of accounting for threshold effects and macro-policy stance in evaluating capital flow management and incorporating adjustment frictions into theoretical models. |
| Keywords: | capital controls, macroprudential policy, international capital flows |
| JEL: | F32 F33 F41 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:wes:weswpa:2025-006 |
| By: | Alemnew, Teklebirhan; Taffesse, Alemayehu Seyoum |
| Abstract: | In both developing and developed economies, academic and policy discussions have consistently emphasized that achieving stable economic growth and maintaining internal and external balance require an exchange rate aligned with its long-term equilibrium value. This paper examines the impact of real exchange rate misalignment on Ethiopia's economic growth from 1980 to 2022. The study begins by estimating the equilibrium real exchange rate using the Behavioral Equilibrium Exchange Rate (BEER) approach to calculate the misalignments. It then analyzes the effects of these misalignments on economic growth using Vector Autoregressive (VAR) and Hansen's (2000) threshold regression model. The VAR and Impulse Response Function (IRF) analyses reveal that real exchange rate misalignments have an immediate positive impact on economic growth, which diminishes between the eighth and sixteenth years and stabilizes as a permanent long-term effect. The threshold regression results indicate that undervaluation of the Ethiopian Birr enhances economic growth up to a 13.95% deviation from the equilibrium real exchange rate, while overvaluation supports growth up to a 7.15% threshold. Beyond these limits, misalignments hinder growth. The study underscores the importance of avoiding excessive deviations from the equilibrium exchange rate to sustain economic growth. Furthermore, it highlights the need for consistent macroeconomic policies to minimize the gap between the actual and equilibrium real exchange rates. These findings emphasize the critical role of exchange rate policy in promoting sustainable economic development in Ethiopia. |
| Keywords: | economic growth; policies; exchange rate; Ethiopia; Africa; Eastern Africa; Sub-Saharan Africa |
| Date: | 2024–12–31 |
| URL: | https://d.repec.org/n?u=RePEc:fpr:ceaspb:172441 |
| By: | Heng-fu Zou |
| Abstract: | This paper develops a dynamic, multi-country model in which governments strategically set import tariffs to fund national defense, and representative agents derive utility from consumption, capital, foreign asset holdings, and publicly financed military strength. The model embeds mercantilist-nationalist preferences within a linear-quadratic-Gaussian (LQG) framework, allowing closed-form solutions for optimal consumption, savings, and trade behavior. We extend the model to a mean field game, where each government optimizes its tariff policy in response to the aggregate tariff behavior of all other countries. The equilibrium is characterized by a Hamilton-Jacobi-Bellman-Fokker-Planck system and features endogenously determined global interest rates, cross-country capital flows, and securitized trade patterns. Simulations reveal a structural mercantilist trap: globally depressed interest rates, strategic reserve ac cumulation, and persistent trade imbalances. The model explains how decentralized, rational policy behavior under sovereignty and security concerns gives rise to systemic instability and geopolitical fragmentation in today's global economic order. |
| Keywords: | Mercantilism, Strategic Trade Policy, Mean Field Games, National Defense, Foreign Asset Accumulation |
| Date: | 2025–05–03 |
| URL: | https://d.repec.org/n?u=RePEc:cuf:wpaper:760 |
| By: | Ken-ichi Hashimoto; Yoshiyasu Ono; Matthias Schlegl |
| Abstract: | In this paper, we develop a small open economy model of secular stagnation that allows for both unemployment and underemployment. While unemployment results from the standard search and matching friction, underemployment in the form of an involuntary shortfall of working hours occurs under stagnation when households have a strong desire to save in the form of insatiable liquidity preferences. This secular stagnation equilibrium is characterized by persistent deflation and aggregate demand shortage. In this steady state, an improvement in the terms of trade reduces global demand for domestic products and lowers working hours, thereby exacerbating deflation and decreasing consumption and aggregate demand. Consequently, firm profits fall and unemployment worsens. These results are in sharp contrast to the case of a non-stagnant economy, where an improvement in the terms of trade increases consumption without affecting the employment rate. |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:dpr:wpaper:1285 |
| By: | Alberto Isgut (Macroeconomic Policy and Financing for Development Division, United Nations Economic and Social Commission for Asia and the Pacific) |
| Abstract: | Managing currency risk is a serious challenge for developing countries that are not able to finance most of their financing needs in local currency. Currency risk can increase substantially the cost of servicing sovereign debts, potentially decreasing fiscal space for much needed investments in sustainable development, and lead to a higher default risk. This can make financing sustainable development and climate ambitions too expensive. Thus, given the urgency of scaling up finance for the achievement of the 2030 Agenda and the goals of the Paris Agreement, addressing the risk of foreign currency financing should be an urgent priority. To reduce exposure to foreign currency debt and associated currency risk, this policy brief discusses the importance of developing local currency bond markets and adopting sound macroeconomic policies. In addition, it highlights the importance of developing hedging tools to mitigate currency risk. |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:unt:pbmpdd:pb131 |
| By: | Bruno Pellegrino; Enrico Spolaore; Romain Wacziarg |
| Abstract: | Observed international investment positions and cross-country heterogeneity in rates of return to capital are hard to reconcile with frictionless capital markets. In this paper, we develop a theory of international capital allocation: a multi-country dynamic spatial general equilibrium model in which the entire network of cross-border investment is endogenously determined. Our model features cross-country heterogeneity in fundamental risk, a demand system for international assets, and frictions that cause segmentation in international capital markets. We measure frictions affecting international investment and apply our model to data from nearly 100 countries, using a new dataset of international capital taxes and cultural, geographic and linguistic distances between countries (geopoliticaldistance.org). Our model performs well in reproducing the composition of international portfolios, the cross-section of home bias and rates of return to capital, and other key features of international capital markets. Finally, we carry out counterfactual exercises: we show that barriers to international investment reduce world output by almost 7% and account for nearly half of the observed cross-country differences in capital stock per employee. |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:fda:fdaddt:2025-05 |
| By: | Acosta Henao, Miguel (Central Bank of Chile); Amado, María Alejandra (Bank of Spain); Pérez Reyna, David (Universidad de los Andes); Martí, Montserrat (Central Bank of Chile) |
| Abstract: | This paper investigates the granular transmission of U.S. monetary policy shocks to deviations from the uncovered interest rate parity (UIPDs) in emerging economies. Using a comprehensive dataset from Chile that accounts for firm-bank relationships and the time-variant characteristics of both firms and banks, we uncover several key findings: (1) Shocks to the federal funds rate (FFR) increase banks’ costs of foreign borrowing; (2) these higher credit costs disproportionately affect small firms, raising their UIPDs more than for large firms; (3) this size-differentiated impact stems from the relatively higher interest rates on domestic currency loans faced by small firms; (4) in contrast, interest rates on dollar-denominated loans respond homogeneously across all firms; (5) we find no differential effect on loan quantities, suggesting an active role of credit supply and demand. We rationalize these findings with a small open economy model of corporate default that incorporates heterogeneous firms borrowing from domestic banks in both foreign and domestic currencies. In our model, a higher FFR reduces the marginal cost of defaulting on domestic-currency debt for small firms more than for large firms |
| Keywords: | Uncovered interest rate parity; U.S. monetary policy; bank lending; firm financing; firm heterogeneity |
| JEL: | E43 E44 F30 F41 |
| Date: | 2025–06–04 |
| URL: | https://d.repec.org/n?u=RePEc:col:000089:021387 |
| By: | Álvaro Fernández-Gallardo (BANCO DE ESPAÑA); Iván Payá (UNIVERSIDAD DE ALICANTE) |
| Abstract: | Recent theoretical studies have highlighted that both the level of public debt and the unit cost of servicing the debt (r-g) play a role in the sustainability of public finances. This paper builds on this literature and introduces a new approach to analysing the relationship between economic downturns and sovereign debt risks by considering the total public debt burden, that is, the interaction between the level of debt and r-g. We conduct this analysis for 18 advanced economies over a span of 150 years, uncovering three novel findings. First, we document that the level of public debt and the interest-growth differential convey distinct information about public finances conditions, reinforcing the argument for incorporating both measures in the assessment of sovereign debt sustainability risks. Second, we offer a long-term historical perspective on the role of the total public debt burden in shaping the severity of recessions and the pace of subsequent recoveries. Our findings demonstrate that a high public debt burden is associated with deeper economic contractions, sharper declines in investment, deflationary pressures and pronounced credit contractions during recessions. Further analysis of plausible transmission mechanisms suggests that an elevated total debt burden at the onset of recessions is linked to more limited accommodative policies during financial crises. Third, we document the feedback effects of financial crises on the components of the total public debt burden, demonstrating that both the level and cost of public debt systematically deteriorate, thereby heightening the risk of sovereign debt crises in the aftermath of financial turmoil. |
| Keywords: | financial crises, sovereign debt sustainability, r-g, local projections |
| JEL: | E62 G01 H63 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2527 |
| By: | Daniel Stodt |
| Abstract: | This study focuses on the non-linearity of fiscal multipliers in the Czech Republic and their dependence on the phase of the economic cycle. Using an STVAR model, the variability of fiscal multipliers across different economic phases is analyzed. The findings show that fiscal multipliers are higher during recessions (1–1.5) and lower during expansions (0–0.5), aligning with the general scientific consensus. The study also suggests that as the strength of an economic expansion gradually declines, multipliers gradually increase. These results emphasize the effectiveness of fiscal policy during recessions and its importance in stabilizing aggregate demand. However, the research highlights limitations caused primarily by the short available data series and the limited number of recessionary episodes in the Czech Republic, which may impact the generalizability of the findings. |
| Keywords: | Business cycle, fiscal multipliers, STVAR |
| JEL: | C32 E62 H30 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:cnb:wpaper:2025/3 |
| By: | Nikolaos Giannakis (Democritus University of Thrace); Periklis Gogas (Democritus University of Thrace); Theophilos Papadimitriou (Democritus University of Thrace); Jamel Saadaoui (University Paris 8); Emmanouil Sofianos (University of Strasbourg) |
| Abstract: | This study aims to predict currency, banking, and debt crises using a dataset of 184 crisis events and 2896 non-crisis cases from 79 countries (1970-2017). We tested eight machine learning methods: Logistic Regression, KNN, SVM, Random Forest, Balanced Random Forest, Balanced Bagging Classifier, Easy Ensemble Classifier, and Gradient Boosted Trees. The Balanced Random Forest had the best performance with a 72.91% balanced accuracy, predicting 149 out of 184 crises accurately. To address machine learning’s black-box issue, we used Variable Importance Measure (VIM) and Partial Dependence Plots (PDP). International reserve holdings, inflation rate, and current account balance were key predictors. Depleting international reserves at varying inflation levels signals impending crises, supporting the buffer effects of international reserves. |
| Keywords: | Currency crises, banking crises, debt crises, international reserve holdings, inflation, machine learning, forecasting |
| JEL: | F G |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:inf:wpaper:2025.6 |
| By: | Abdul Khaliq; Syafruddin Karimi; Werry Darta Taifur; Endrizal Ridwan |
| Abstract: | The Generalized Supremum Augmented Dickey-Fuller (GSADF) technique is performed to resolve whether the Indonesian Rupiah/US exchange rate has experienced multiple explosive bubbles. The GSADF uncovers that the Indonesian Rupiah/US exchange rate deviates from the fundamental values by six times from January 1985 to September 2023, periodically indicating the presence of numerous explosive behaviors. Once the full-sample period separates into the managed-floating regime and the free-floating regime, the GSADF still detects multiple bubbles. Of particular curiosity on uncertainty trinity, this study underlines that global geopolitical risk negatively drives explosive actions in the ratio of exchange rates for non-traded and traded goods. The global economic policy uncertainty negatively affects speculative bubbles in the exchange rate and the ratio of exchange rates for non-traded. The country's geopolitical risks negatively strike only speculative bubbles in the exchange rate. Further, we find heterogeneity in our results by examining different exchange rate systems. The robustness checks further firmly ascertain across baseline empirical findings. |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2505.02869 |
| By: | Wallace P. Marcelino (FACE/UFMG); Fabrício Missio (Cedeplar/UFMG); Frederico G. Jayme Jr (Cedeplar/UFMG) |
| Abstract: | This article discusses theoretically the role of the Real Exchange Rate (RER) on the integration of industrial and modern services sectors. It highlights the historical importance of manufacturing in economic growth and explains how deindustrialization since the 1970s has elevated the significance of modern services, which are critical for productivity and innovation. The symbiotic relationship between the manufacturing and services sectors is a vital force that induces pro-growth structural economic change. We demonstrate how competitive RER encourages structural adjustments and investments, promoting interaction between the manufacturing and services sectors, particularly in developing economies, thereby enhancing global competitiveness. In a two-cycle process, a competitive RER initially boosts profitability and external competitiveness, leading to increased automation and collaboration with modern services. This interaction catalyzes "amplified dynamic increasing returns to scale, " driven by shared innovations. Over time, as sectors reap profits, they deepen their integration, improve products, and broaden market access. Consequently, the RER fosters a symbiotic relationship that is essential for sustainable economic development and competitiveness in international trade. |
| Keywords: | Optimal taxation, General equilibrium, Default, Public expenditure shocks, COVID-19 |
| JEL: | O4 E6 L8 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:cdp:texdis:td680 |