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on Open Economy Macroeconomics |
| By: | Colin C. Caines; Amartya Lahiri |
| Abstract: | Saving rates are significantly different across countries and remain different for long periods of time. This paper provides an explanation for this phenomenon. We formalize a model of a world economy comprised of open economies inhabited by heterogeneous agents endowed with recursive preferences. Our assumed preferences imply increasing marginal impatience of agents as their consumption rises relative to average consumption of a reference group. Using measured productivity as the sole exogenous driver, we show that the model can not only reproduce the sustained long run differences in average saving rates across countries, but also provides a good fit to the time series behavior of saving observed in the data. |
| Keywords: | World savings; Recursive preferences |
| JEL: | E20 F30 F40 |
| Date: | 2025–08–22 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:1416 |
| By: | Alberto Montagnoli; Miroslava Quiroga-Trevino; Christoph Thoenissen |
| Abstract: | This paper provides empirical evidence on the balance sheet channel of fiscal policy in peripheral European economies. Our findings using a Panel VAR, reveal that shifts in financial institutions' balance sheets following a debt-financed fiscal expansion, reduce credit provision and investment in these countries. Moreover, the analysis indicates that economies with higher sovereign exposure experienced higher credit crunches and investment declines. To explore the underlying mechanisms, we estimate a DSGE model that incorporates banks as primary holders of sovereign debt. The model shows that sovereign exposure amplifies the negative effects on credit supply, lowering investment and capital formation. A counterfactual scenario without bank-held sovereign bonds isolates the contribution of the balance sheet channel: removing this channel weakens the crowding-out effect, with investment falling 0.2 percentage points less and output increasing by 0.02 percentage points more. These effects appear stronger during the financial and sovereign debt crises. |
| Keywords: | SVAR;DSGE;Bayesian estimation;Fiscal policy;Sovereign debt;Credit;Euro Area. |
| JEL: | C11 E32 E44 E62 H63 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:bdm:wpaper:2025-12 |
| By: | Yazdan Babazadeh Maghsoodlo; Amin Safaeesirat |
| Abstract: | Understanding the stochastic behavior of currency exchange rates is critical for assessing financial stability and anticipating market transitions. In this study, we investigate the empirical dynamics of the USD exchange rate in three economies, including Iran, Turkey, and Sri Lanka, through the lens of the Kramers-Moyal expansion and Fokker-Planck formalism. Using log-return data, we confirm the Markovian nature of the exchange rate fluctuations, enabling us to model the system with a second-order Fokker-Planck equation. The inferred Langevin coefficients reveal a stabilizing linear drift and a nonlinear, return-dependent diffusion term, reflecting both regulatory effects and underlying volatility. A rolling-window estimation of these coefficients, paired with structural breakpoint detection, uncovers regime shifts that align with major political and economic events, offering insight into the hidden dynamics of currency instability. This framework provides a robust foundation for detecting latent transitions and modeling risk in complex financial systems. |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2507.01989 |
| By: | Dorosh, Paul; Pradesha, Angga |
| Abstract: | The large inflow of foreign capital to fund PNG investments in natural gas pipeline and processing infrastructure resulted in a surge in inflation beginning in 2011. Costs of production of tradable goods such as coffee and palm oil rose more (in kina terms) than their output prices, reducing the profitability of these sectors. These price distortions have continued to the present day, as restrictions on access to foreign exchange (mainly through delays in the release of funds) as demand for foreign exchange exceeds supply made available to the public. This policy note reviews PNG’s exchange rate policies and uses an economy-wide simulation model1 to quantify the impacts of these distortions. We conclude with a discussion of policy implications, highlighting the effects of a possible devaluation / depreciation of the kina. |
| Keywords: | capital; exchange rate; policies; prices; valuation; Papua New Guinea; Oceania |
| Date: | 2025–08–26 |
| URL: | https://d.repec.org/n?u=RePEc:fpr:prnote:176217 |
| By: | Marcos Mac Mullen; Soo Kyung Woo |
| Abstract: | This paper studies the drivers of the US real exchange rate (RER), with a particular focus on its comovement with net trade (NT) flows. We consider the entire spectrum of frequencies, as the low-frequency variation accounts for 62 and 64 percent of the unconditional variance of the RER and NT, respectively. We develop a generalization of the standard international business cycle model that successfully rationalizes the joint dynamics of the RER and NT while accounting for the major puzzles of the RER. We find that, while financial shocks are necessary to capture high frequency variation in the RER, trade shocks are essential for the lower frequency fluctuations. |
| Keywords: | International Business Cycles; Exchange Rates; Trade Balance; Trade Dynamics |
| JEL: | E30 E44 F30 F41 F44 |
| Date: | 2025–08–27 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:1419 |
| By: | Albertazzi, Ugo; Hooft, James ’t; Ter Steege, Lucas |
| Abstract: | In contrast to the conventional Fisherian view that inflation reduces real debt positions, we show that significant increases in inflation are strongly associated with financial crises. In the spirit of Jordà et al. (2020), countries with free and fixed ex-change rates can be compared to difference out the confounding reaction of monetary policy. Across a dataset of 18 advanced economies over 151 years, we show that the impact of inflation extends beyond its indirect effect via monetary policy. To further corroborate causality, we instrument inflation with oil supply shocks, finding that a 1pp rise in inflation doubles the probability of financial crisis from its sample average. We give evidence for the redistribution channel, where inflationary shocks directly cut real incomes, as a possible mechanism. In conjunction with recent literature on the dangers of rapidly tightening monetary policy, our results point to a difficult trade-off for central banks once inflation has risen. JEL Classification: E31, E44, E58, G01 |
| Keywords: | currency pegs, financial crises, inflation, monetary policy, oil supply |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253108 |
| By: | Sebastian Fossati (University of Alberta); Xiao Li (University of Alberta) |
| Abstract: | We model the conditional distribution of future exchange rate returns for nine currencies as a function of real-time financial conditions. We show that the lower and upper quantiles of the exchange rate return distribution exhibit significant in-sample co-movement with financial conditions. Similarly, the conditional moments of the out-of-sample forecast display time-varying patterns, with the variance and kurtosis showing the most pronounced changes during and after the 2008-09 financial crisis. Deteriorating financial conditions are associated with an increase in volatility, particularly for commodity currencies. Overall, we conclude that financial conditions capture tail dependencies in exchange rate returns and contain valuable information for out-of-sample prediction. |
| Keywords: | exchange rates; financial conditions; NFCI; density forecasts |
| JEL: | C22 F31 G17 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:ris:albaec:021546 |
| By: | Jean-Paul L'Huillier; Kirill Shakhnov; Laure Simon |
| Abstract: | The bulk of the news shocks literature focuses on shocks materializing after four or five quarters, with limited evidence on news about longer-run events. We build a new dataset of discovery and production start dates for a wide range of giant commodity discoveries worldwide from 1960 to 2012. Standard open economy models match the empirical responses of short-run news but fail in the case of long-run news. Incorporating financial frictions in the form of collateral constraints is crucial for capturing the dynamics implied by long-run news. We also provide direct evidence on the role of these frictions. |
| Keywords: | Business fluctuations and cycles; International topics |
| JEL: | E23 F3 F4 Q33 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:25-24 |
| By: | Zhi Wang; Shang-Jin Wei; Xinding Yu; Kunfu Zhu |
| Abstract: | Based on the new integrated accounting framework of global supply chains (GSC) (Wang, Wei, Yu, and Zhu, 2025), we derive three types of economic dependence (producers’ dependence on upstream supplies, producers’ dependence on downstream markets, and consumers’ dependence on supply chains) that take into account of the presence of foreign invested firms as well as international trade. To measure indirect value flows between the origin and destination countries that are mediated through third economies, we show a need to go beyond both trade-in-value added and gross trade statistics. As an application, we derive new measures of inter-dependence between the United States and China. |
| JEL: | F0 F1 F2 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34226 |
| By: | Ms. Emine Boz; Anja Brüggen; Camila Casas; Georgios Georgiadis; Ms. Gita Gopinath; Arnaud Mehl |
| Abstract: | This paper presents the most comprehensive and up-to-date panel dataset on global trade invoicing currency and examines recent pattern shifts with a focus on geopolitical alignment. Using data for 132 countries from 1990 to 2023—including new coverage of the Chinese renminbi—we document five key findings. First, the US dollar remains dominant, with global invoicing shares broadly stable. Second, renminbi use has grown steadily and expanded beyond Asia, though it remains modest. Third, countries not geopolitically aligned with the US continue to rely on the dollar, though this reliance has declined in a few key economies. Fourth, since 2021, the correlation between the use of a given invoicing currency and the geopolitical distance to its issuer has become more negative, reflecting growing polarization. Fifth, there is no robust evidence consistent with effective policy initiatives to reduce dollar reliance in oil exports. These findings highlight the resilience of dominant currencies and suggest emerging fragmentation in invoicing patterns along geopolitical lines. |
| Keywords: | Trade invoicing currency; dominant-currency paradigm; geopolitical alignment |
| Date: | 2025–09–12 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/178 |
| By: | Syed M. Ahsan; S. Quamrul Ahsan |
| Abstract: | Per-capita national income remains a primary indicator of wellbeing in an international comparison. Accordingly, the World Bank has popularised the concept of constant-dollar income of a given base year (say 2015), which converts income denominated in constant local currency units (LCU) to a common base year and uses the market exchange rate of that year to derive the ‘2015 constant-USD’ income which is directly comparable across nations. The issue we address here centres on the evolving base year; with each change, a new constant USD income series is born embodying the base-year market exchange rate, which tends to be volatile. Predictably, the prior ranking of income of any two countries may well get reversed. To be concrete, as per 2010-base, Japan’s per capita GDP appeared to have peaked in 1991 at 10.4 percentage points above the US level, but by the constant 2015 metric, the 1991 Japanese income was only about 3/4th. Was Japan actually richer than the US in 1991? In an attempt to answer this, we propose replacing the market rate by a smoothed exchange rate. We then compare the smoothed exchange rates as well as the resulting constant-dollar income series with the PPP exchange rate and PPP income. We show that some of the smoothed rates yield exchange rates that are at least as stable as the PPP, measure the exchange rate movement at par with PPP, and the predicted income levels appear mutually consistent with the PPP income. |
| Keywords: | constant USD income, GDP deflator, market exchange rate, PPP exchange rates, smoothed exchange rates, per capita real income |
| JEL: | E31 F31 O11 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12097 |
| By: | Friederike Niepmann; Leslie Sheng Shen |
| Abstract: | How do banks respond to geopolitical risk, and is this response distinct from other macroeconomic risks? Using U.S. supervisory data and new geopolitical risk indices, we show that banks reduce cross-border lending to countries with elevated geopolitical risk but continue lending to those markets through foreign affiliatesâ unlike their response to other macro risks. Furthermore, banks reduce domestic lending when geopolitical risk rises abroad, especially when they operate foreign affiliates. A simple banking model in which geopolitical shocks feature expropriation risk can explain these findings: Foreign funding through affiliates limits downside losses, making affiliate divestment less attractive and amplifying domestic spillovers. |
| Keywords: | Geopolitical risk; Bank lending; Credit risk; International spillovers |
| JEL: | F34 F36 G21 |
| Date: | 2025–08–27 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:1418 |