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on Open Economy Macroeconomics |
| By: | Ifrim, Adrian; Kollmann, Robert; Pfeiffer, Philipp; Ratto, Marco; Roeger, Werner |
| Abstract: | Based on an estimated two-region dynamic general equilibrium model, we show that the persistent productivity growth differential between the Euro Area (EA) and rest of the world (RoW) has been a key driver of the EA trade surplus since the launch of the Euro. A secular decline in the EA’s spending home bias and a trend decrease in relative EA import prices account for the stability of the EA real exchange rate, despite slower EA output growth. By incorporating trend shocks to growth and trade, the analysis departs from much of the open-economy macroeconomics literature which has focused on stationary disturbances. Our results highlight the relevance of non-stationary shocks for the analysis of external adjustment. |
| Keywords: | global growth divergences, trade balance, real exchange rate, estimated DSGE model, Euro Area, demand and supply shocks, persistent growth shocks |
| JEL: | C5 E2 E3 F3 F4 |
| Date: | 2025–07–21 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125401 |
| By: | Fotis Delis (European Commission, Joint Research Centre); Manthos D. Delis (Audencia Business School); Sotirios Kokas (University of Essex - Essex Business School); Luc Laeven (European Central Bank (ECB); Centre for Economic Policy Research (CEPR)); Steven Ongena (University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)) |
| Abstract: | Profit shifting by multinational enterprises (MNEs) increases after-tax earnings but can expose firms to regulatory and reputational risks. We examine how stock markets price profit shifting using global profit shifting estimates from approximately 30, 000 MNE-year observations between 2010 and 2020. We find that a one standard deviation increase in profit shifting is associated with 6.4% higher monthly stock returns, indicating that stock markets require compensation for the underlying risks. The identified effects become significant only after the initiation of the Base Erosion and Profit Shifting program and gain further strength following the implementation of the Tax Cuts and Jobs Act. |
| Keywords: | Corporate taxes, Profit shifting, Stock returns, Enforcement risk, Global data |
| JEL: | G14 H25 H26 F23 F42 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2562 |
| By: | Daiya Mita (Nomura Asset Management Co. Ltd.); Taiga Saito (Graduate School of Economics, Hitotsubashi University); Akihiko Takahashi (Graduate School of Economics, The University of Tokyo) |
| Abstract: | For global multi-asset fund managers, reflecting their macroeconomic views in the prediction of expected interest rates across countries, exchange rates, and equity prices in a manner consistent with economic theory is challenging. The existing literature has yet to provide an established multi-currency model that is flexible enough to incorporate such views into the prediction of future asset price dynamics. To address this problem, this paper proposes a novel multi-currency incomplete market model in which agents in each country have logarithmic utility but differ in their time references and subjective beliefs, within a market equilibrium framework, namely, supply and demand equilibrium. With only a few exogenous inputs, such as each country’s output process and agents’ preference parameters, the model endogenously determines equilibrium interest rates, exchange rates, and stock prices, along with optimal consumption and portfolios. Thus, the model enables us to (i) flexibly incorporate cross-country differences in investors’ time preferences and macroeconomic outlooks, and (ii) examine how these differences affect equilibrium interest rates and asset prices, including stock prices and exchange rates. Moreover, by applying the particle filtering method within a state-space framework based on the two-country, two-currency version of the model to Japanese and U.S. market data (equity index futures, short-term interest rates, and the exchange rate), the model not only fits the observed dynamics of equity indices, short rates, and the exchange rate, but also effectively estimates the dynamics of home-country biases and latent economic factors, which can be utilized in making investment decisions in asset management practice. |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:cfi:fseres:cf603 |
| By: | Philippe Bacchetta (University of Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); J. Scott Davis (Federal Reserve Banks - Federal Reserve Bank of Dallas); Eric van Wincoop (University of Virginia - Department of Economics; National Bureau of Economic Research (NBER)) |
| Abstract: | Global non-US banks have significant dollar exposure both on and off their balance sheet. We develop a model to analyze their adjustment to dollar funding shocks, whether from reduced direct lending or external dollar shortages. The model provides insight into banks' responses through borrowing, lending, and FX swap positions, as well as the impact on their net worth, their probability of default and CIP deviations. Implications of the model are confronted with data on the response of non-US global banks to major dollar funding shocks. We examine the benefits from buffering these shocks through central bank dollar swap lines or local currency lending by the central bank. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2565 |
| By: | Farid Farrokhi; Elliot Kang; Heitor S. Pellegrina; Sebastian Sotelo |
| Abstract: | We study deforestation in a dynamic world trade system. We _rst document that between 1990-2020: (i) global forest area has decreased by 7.1 percent, with large heterogeneity across countries, (ii) deforestation is associated with expansions of agricultural land use, (iii) deforestation is larger in countries with a comparative advantage in agriculture, and (iv) population growth causes deforestation. Motivated by these facts, we build a model in which structural change and comparative advantage determine the extent, location, and timing of deforestation. Using the model, we obtain conditions under which reductions in trade costs and tariffs reduce global deforestation. Quantitatively, eliminating global agricultural tariffs has limited impacts on global forest area, leads to substantial forest reallocation across countries, and results in net welfare benefits. |
| Keywords: | International trade, deforestation, dynamics, land use, trade policy |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:apc:wpaper:209 |
| By: | Juan Francisco Gomez (UBA); Eduardo Levy Yeyati (UTDT); Patricio Temperley (UTDT) |
| Abstract: | We develop a novel balance-of-payments (BoP) classification to distinguish reserves accumulated via public external borrowing (a precautionary "self-insurance" motive) from those built up through private capital inflows (sterilized "leaning-against-the-wind" of capital flows (or LAW interventions) to estimate the impact of reserve changes on sovereign spreads and financial stress according to their source of finance. We find that increases in reserves funded by private inflows significantly compress sovereign credit spreads and reduce the probability of a financial-stress episode, whereas reserves changes due to external debt issuance have a much weaker or a statistically insignificant effect. These findings hold in pre- and post- global financial crisis subsambles and robustness checks. |
| Keywords: | Sovereign spreads, international reserves, balance-of-payments, "leaning against the wind" interventions |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:aoz:wpaper:370 |
| By: | Carlos Segura-Rodriguez (Department of Economic Research, Central Bank of Costa Rica); David Ching-Vindas (Department of Economic Research, Central Bank of Costa Rica) |
| Abstract: | This paper presents a new estimation of a Financial Conditions Index (FCI) and, following Adrian et al. (2019), the first growth-at-risk analysis for the Costa Rican economy. The FCI is constructed using the dynamic factor model technique since 1996. For those variables that are reported after this date, we use Stock y Watson (2002) proposal to fill for the missing values. The FCI effectively captures recent episodes of restrictive and lax financial conditions. The growth-at-risk analysis incorporates the impact of terms of trade to account for international risks relevant to a small, open economy like Costa Rica. The results show that, at one and four quarters ahead, both restrictive financial conditions and improvements in terms of trade have a negative and statistically significant effect on the 5th percentile of growth, but not on other percentiles or on the expected value. This underscores the importance of assessing how financial conditions and terms of trade influence risks to future economic growth. ***Resumen: Este trabajo presenta una nueva estimación de un Índice de Condiciones Financieras (ICF) y, con base en Adrian, Boyarchenko y Giannone (2019), el primer análisis de crecimiento en riesgo (Growth-at-Risk) para la economía costarricense. El ICF se construye con la metodología de factores dinámicos a partir de 1996. Se utiliza la propuesta de Stock y Watson (2002) para incluir variables para las que se tiene información para años posteriores. El ICF replica de manera apropiada los episodios recientes de condiciones financieras restrictivas y laxas. En el análisis de crecimiento en riesgo, se incluyó el impacto de los términos de intercambio para captar riesgos internacionales relevantes para una economía pequeña y abierta como Costa Rica. Los resultados indican que, a un trimestre y a cuatro trimestres, tanto las condiciones financieras restrictivas como la mejora en los términos de intercambio tienen un efecto negativo y estadísticamente significativo para el percentil 5, pero no para los demás percentiles ni en el nivel promedio. Esto subraya la importancia de evaluar cómo las condiciones financieras y los términos de intercambio influyen en los riesgos para el crecimiento económico futuro. |
| Keywords: | Growth-at-risk, Financial conditions, Terms of trade, Términos de intercambio, Condiciones financieras, Crecimiento en riesgo |
| JEL: | C21 C38 E44 F43 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:apk:doctra:2501 |
| By: | Viacheslav Sheremirov; Hillary Stein |
| Abstract: | This paper shows that global inflation dynamics have a sizable regional component. Using a balanced panel of 61 countries that starts in 1970, we document that while the global factor, defined as the dominant principal component, explains a large portion of inflation variation in advanced economies, a model with only one principal component is less successful for developing countries. By contrast, a hierarchical dynamic factor model, which includes a global (unconstrained) factor and regional (restricted) factors, performs substantially better for emerging market and developing economies. The regional factors are linked to commodity prices and help improve the accuracy of inflation forecasts at the country level. Employing an unsupervised machine-learning technique, we show that the estimated clusters of countries, grouped according to similarities in inflation dynamics, exhibit a strong regional pattern. Our findings suggest that policymakers in developing countries should pay close attention to inflation dynamics in their neighboring countries. |
| Keywords: | clustering; developing countries; globalization; inflation |
| JEL: | E3 E5 F4 F6 |
| Date: | 2025–08–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedbwp:101461 |