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on Open Economy Macroeconomics |
| By: | Alessandro Ferrari; Andreas Freitag; Eric Kammerlander; Sarah Lein; Frank Pisch |
| Abstract: | We study exchange-rate pass-through and currency choice in international transactions, focusing on bilateral bargaining power in relationships between domestic buyers and foreign suppliers. Using detailed transaction-level data on Swiss imports from 2014-2023 identifying buyers and suppliers, we show that exchange rate pass-through is lower for economically important suppliers within a buyer's network. This pattern is explained by a higher likelihood of invoicing in the buyer's currency, consistent with a bilateral bargaining model of price setting and endogenous currency choice. Our results imply that bilateral bargaining power shapes how foreign shocks affect prices and external adjustment, making policy transmission network dependent. |
| Keywords: | international economics, trade, finance, markets, manufacturing |
| Date: | 2026–02–19 |
| URL: | https://d.repec.org/n?u=RePEc:cep:cepdps:dp2154 |
| By: | Juan Michelsen |
| Abstract: | This paper studies the macroeconomic effects of global risk shocks (GRS) in a small open economy and their implications for the identification of monetary policy shocks. I construct a novel proxy for GRS based on unexpected daily innovations in the VIX and employ it as an external instrument in a proxy-SVAR for Canada. The advantage of this proxy is that, by exploiting the safe-haven role of the U.S. dollar, it identifies the effects of GRS using only domestic endogenous variables, without imposing restrictions or relying on global aggregates or narratively selected events. GRS that depreciate the Canadian dollar, tighten financial conditions, reduce asset prices, output, and prices, inducing an expansionary monetary policy response. I provide evidence that high-frequency (HF) monetary policy surprises partly reflect endogenous, risk-driven deviations between policy actions and market expectations. Ignoring GRS can lead to an overestimation of monetary policy effects obtained using HF identification. |
| Keywords: | global risk shocks, small open economy, proxy-SVAR, monetary policy surprises |
| JEL: | E52 F41 F42 F44 |
| Date: | 2026–02–19 |
| URL: | https://d.repec.org/n?u=RePEc:bdp:dpaper:0093 |
| By: | Tamar den Besten; Diego R. Känzig |
| Abstract: | We study the macroeconomic effects of tariff policy using U.S. historical data from 1840–2024. We construct a narrative series of plausibly exogenous tariff changes – based on major legislative actions, multilateral negotiations, and temporary surcharges – and use it as an instrument to identify a structural tariff shock. Tariff increases are contractionary: imports fall sharply, exports decline with a lag, and output and manufacturing activity drop persistently. The shock transmits through both supply and demand channels. Prices rise in the full sample but fall post-World War II, a pattern consistent with changes in the monetary policy response and with stronger international retaliation and reciprocity in the modern trade regime. |
| JEL: | E30 F13 F14 F41 H20 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34852 |
| By: | Nicolas Dietl; Sebastian Krautheim |
| Abstract: | We interpret the increased polarization in Western societies over global economic issues as an interaction of economic forces and shifts in a society’s social identity equilibrium. We combine social identity theory with standard small open economy model of international trade to study the effect of economic globalization with a bias towards "unethical" production. Starting from a social cohesion equilibrium where all consumers identify with society at large, we find that a falling price of the unethical variety leads to an erosion of social cohesion and can ultimately lead to a polarized social identity equilibrium where caring consumers are estranged from the society they live in. We show that this form of economic globalization is not only not always a Pareto improvement, but may even lead to aggregate welfare losses. |
| Keywords: | globalization backlash, social identity, polarization, Ricardo, social cohesion |
| JEL: | F13 F68 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12503 |
| By: | Yasin Mimir; Yasin Kürşat Önder; Jose Villegas (-) |
| Abstract: | We document that grace periods are widespread, characterizing 83% of the external sovereign debt stock. This prevalence is largely driven by concessional (official) loans, which account for 73% of the stock and universally feature grace periods. To examine their macroeconomic role, we develop a quantitative model showing that grace periods enhance household welfare by reducing default risk and improving market completeness, yet also increase long-run dependence on non-contingent debt and raise sovereign spreads. We empirically validate these mechanisms using local projection estimates and conduct policy counterfactuals on shortened grace periods, voluntary debt exchanges, and the stigma premium associated with concessional finance. |
| Keywords: | Sovereign debt, default, concessional loans, grace period, stigma premium |
| JEL: | E44 F34 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:rug:rugwps:26/1137 |
| By: | Marco Graziano; Marius Koechlin; Andreas Tischbirek |
| Abstract: | We study the spillovers of large-scale asset purchases (LSAPs) in the U.S. on financial intermediation in the euro area using bank-level supervisory data and high-frequency identified policy surprises. Our detailed panel data permit us to trace the impact of LSAPs through bank balance sheets. We find that the Federal Reserve affects credit provision in the euro area through a channel that we refer to as the "international bank capital channel" of unconventional monetary policy. In response to an LSAP shock that leads to a steepening of the U.S. Treasury yield curve, the Treasury positions of euro area banks shrink, capital ratios worsen, and banks that are less well capitalized contract their lending relative to banks that are better capitalized. Our results are consistent with an important role of revaluation effects, imperfect risk hedging, and credit as an adjustment margin for banks in the proximity of regulatory capital constraints. |
| Keywords: | large-scale asset purchases, international spillovers, global financial cycle, credit channel of monetary policy, U.S. treasury yield curve, exchange rates |
| JEL: | E52 F42 F44 G21 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12409 |
| By: | António Afonso; José Alves; João Tovar Jalles; Sofia Monteiro |
| Abstract: | Climate change is reshaping sovereign risk and macroeconomic stability by amplifying fiscal and external fragilities. This paper develops a unified framework to assess how climate vulnerability and resilience jointly influence fiscal–external solvency. We construct a market-based sustainability index that integrates time-varying fiscal and external reaction coefficients – estimated using Schlicht’s (2021) method-weighted by sovereign yields. Using a global panel of more than 60 economies (1981–2024), we document four key findings. First, structural vulnerability exerts a large and persistent drag on sustainability, even after controlling for macro fundamentals, as higher exposure magnifies expected losses and tightens financing conditions. Second, resilience does not display a strong unconditional effect but significantly mitigates the adverse impact of vulnerability, acting as a state-contingent stabilizer. Third, local projections with smooth transition (LP-STAR) reveal sharp nonlinearities: identical climate shocks trigger modest, short-lived effects in low-vulnerability or high-resilience regimes but cause deep and persistent deterioration when vulnerability is high and resilience weak. Fourth, these dynamics generate an “adaptation trap” – a self-reinforcing cycle where vulnerability raises yields, yields compress fiscal space, and limited adaptation perpetuates vulnerability. Policy implications are clear: resilience investment yields sizable macro-financial returns by reducing expected losses and compressing climate risk premia, while delaying adaptation risks entrenching fragility. Our results highlight the need to embed climate parameters into debt sustainability analyses and sovereign risk frameworks, particularly for emerging markets facing tighter financing constraints. |
| Keywords: | climate vulnerability, climate resilience, fiscal sustainability, external sustainability, sovereign risk premia |
| JEL: | C33 E62 F34 H63 Q54 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12389 |
| By: | forbes, Kristin; Ha, JONGRIM; Kose, M. Ayhan |
| Abstract: | Business cycles are increasingly driven by global shocks, rather than the domestic demand shocks prominent in earlier decades, posing challenges for central banks seeking to meet domestic mandates and communicate their policy decisions. This paper analyzes the evolving influence and characteristics of global and domestic shocks in advanced economies from 1970-2024 using a new FAVAR model that decomposes movements in interest rates, inflation, and output growth into four global shocks (demand, supply, oil, and monetary policy) and three domestic shocks (demand, supply, and monetary policy). We find that the role of global shocks has increased sharply over time and that their characteristics differ from those of domestic shocks across multiple dimensions. Compared to domestic shocks, global shocks have a larger supply component, higher variance, more persistent effects on inflation, and are more asymmetric (contributing more to tightening than to easing phases of monetary policy). As global supply shocks have become more prominent, central banks have also been less willing to “look through” their effects on inflation than for comparable domestic shocks. The distinct characteristics and rising influence of global shocks—particularly global supply shocks—have significant implications for modeling monetary policy and designing central bank frameworks. |
| Keywords: | Demand shocks; supply shocks; geopolitical risk; oil prices; supply-chain disruptions; global uncertainty, central banks, Federal Reserve; European Central Bank |
| JEL: | E31 E32 E52 Q43 |
| Date: | 2026–01–31 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:127928 |
| By: | Ernest Miguelez; Michele Pezzoni; Fabiana Visentin; Catalina Martínez; Reinhilde Veugelers; Julio Raffo |
| Abstract: | This paper examines the evolving geography of international technological knowledge diffusion over the last four decades using multiple patent-based indicators. We first review the main mechanisms through which knowledge diffuses across borders—including trade and global value chains, foreign direct investment, skilled migration, global science, and markets for technology—highlighting their complementarities and the role of domestic capabilities. We then provide new empirical evidence based on cross-border patent citations, technological trajectories defined by IPC recombinations, patent-to-science linkages, and international patent families. The results reveal persistent asymmetries, with a small group of advanced economies remaining central knowledge hubs, alongside the rising role of emerging countries, especially China. Science-based technologies diffuse farther and faster, while capability constraints continue to limit integration for many regions. |
| Keywords: | Technological knowledge diffusion, Geography, Patents, Citations, Technological trajectories, Science, Patent families |
| JEL: | O34 O33 F14 F23 R12 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:wip:wpaper:92 |
| By: | Adrien Concordel; Phuong Ho; Christopher R. Knittel |
| Abstract: | This paper compares the impacts of critical mineral price and oil price on an economy in a unified neoclassical growth model. Unlike oil price shocks, which affect the cost of utilizing existing capital (e.g., cars), critical mineral price shocks influence the cost of creating new capital (e.g., electric vehicles) without altering the cost of existing capital. We find that both types of shocks ultimately reduce output and welfare. However, oil-price increases are systematically more contractionary for the economy. Mineral-price increases generate comparatively larger adjustments in investment, capital, and external borrowing but smaller and more gradual losses in output and welfare, and in capital-rich economies can slightly raise long-run employment. These results imply that oil-price shocks remain the more serious threat to aggregate activity and welfare, whereas mineral-price shocks call for policies that smooth investment and external-balance-sheet adjustment (e.g., macroprudential tools and precautionary reserves or fiscal buffers). |
| JEL: | E22 E32 F41 Q41 Q43 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34847 |
| By: | Bumsoo Kim; Marc De la Barrea; Masao Fukui |
| Abstract: | We develop a dynamic quantitative model of trade and labor adjustment, incorporating nominal wage rigidity and consumption–saving decisions, to study how China’s currency peg interacted with its rapid growth in shaping the US economy. We show that the peg temporarily boosts China’s export growth by preventing an appreciation of the Chinese currency, thereby amplifying the US labor-market consequences of the China shock. At the same time, the temporary export boom increases China’s savings and leads to a larger US trade deficit. Calibrating the model to match trade and labor-market flow data, we find that China’s currency peg played a quantitatively important role in the US manufacturing decline, the widening US trade deficit, and unemployment dynamics. These results underscore the importance of exchange-rate adjustment (or the lack thereof) for understanding trade shocks. We also find that the overall welfare impact of the China shock remains significant and positive. |
| JEL: | F0 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34823 |
| By: | Johannes Marzian; Christoph Trebesch |
| Abstract: | We study the fiscal consequences of large military buildups. To do so, we assemble the Global Budget Database, a comprehensive dataset of disaggregated central government finances for 20 countries from 1870 to 2022. We identify 114 episodes of military spending booms, in peace and war, and analyze their financing and long-term fiscal legacy. Consistent with theory, wartime booms are financed primarily through debt, while peacetime booms rely on a more balanced mix of debt and taxes. In contrast to the classic notion of “guns versus butter, ” we find little evidence that social spending is cut during military expansions. Instead, when societies rearm, they tend to choose guns and butter, resulting in higher debt, expenditures, and taxes. Debt rises and later falls, but tax rates and tax revenues remain elevated for 15 years or more. Large geopolitical shocks, in war and peace, result in higher taxes and a lasting fiscal expansion. |
| Keywords: | military finance, rearmament, war, fiscal policy, taxes, government debt |
| JEL: | E62 H20 H61 H87 N10 N40 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12469 |
| By: | Sackey, Lawrence; Nortah-Ocansey, Derick A.; Mensah, Daniel |
| Abstract: | Ghana's banking sector navigated one of its most challenging macro-financial periods between 2020 and 2025, a phase defined by rapid inflation, sharp exchange rate swings, tight fiscal conditions, and elevated interest rates. Despite these pressures, the sector remained functional, resilient, and systemically stable, continuing to provide essential financial intermediation while protecting depositors' funds. Profitability indicators were generally stable in the early years but declined sharply during the height of macroeconomic pressures, particularly when inflation accelerated, cedi weakened significantly together with the huge impairment losses from the domestic debt exchange programme(DDEP), before restoring and stabilizing later in 2023. Credit risk followed an upward trend, with Non-Performing Loans rising as households and firms struggled under increasing costs and reduced real incomes. Capital Adequacy though weakened along the way remained within regulatory requirements and recovered gradually as banks strengthened their balance sheets. Liquidity indicators remained consistently strong throughout, serving as a stable cushion that supported depositor confidence even in the midst of significant macroeconomic volatility. These trends occurred against a backdrop of high inflation, tight monetary policy, elevated interest rates, rapid currency depreciation, domestic debt exchange programme and depleting net international reserves, all of which amplified stress across bank balance sheets. As external reserves improved and inflation moderated from 2024 onwards, overall bankingsector performance strengthened. The experience reinforces a key message: macroeconomic stability is fundamental to banking stability. Banks should continue strengthening creditrisk assessment systems, investing in cost-efficient digital processes, and maintaining strong capitalplanning frameworks that incorporate stress-testing for inflation, interest-rate, and exchange-rate shocks. Policymakers, on their part, must safeguard stability through disciplined fiscal management, credible inflation control, and rebuilding of external buffers to support confidence and reduce systemic risk. |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:gabpbs:336969 |
| By: | Jessica Coria |
| Abstract: | Large volumes of e-waste collected under formal schemes in high-income countries are still processed informally in developing ones, despite continuous policy efforts to reverse this trend. This paper shows that the persistence of informal e-waste processing is a consequence of how global waste flows interact with domestic market structure. I develop a two-country model in which a cost-minimizing broker exports low-value fractions of e-waste to a poorer country, where informal dismantlers and licensed recyclers compete to purchase material from local collectors. Because formal facilities incur fixed-capacity costs, their competitiveness depends on achieving sufficiently high-value throughput. Low-value exports from the rich country increase total inflows but depress the effective high-value throughput and dilute domestic subsidies, keeping average costs high and allowing informal dismantlers to outbid formal recyclers. The model generates a formalization trap with multiple equilibria and explains why widely used policies, including per-unit subsidies, capital support, higher recycling targets in rich countries, and integration of informal collectors into formal systems, often fail to trigger a transition toward formal treatment. |
| Keywords: | electronic waste, Informality, recycling and waste management, international trade in waste, formalization traps, developing countries |
| JEL: | O17 O19 F18 Q53 Q58 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12471 |