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on Open Economy Macroeconomics |
| By: | Győző Gyöngyösi; Judit Rariga; Emil Verner |
| Abstract: | We study how foreign currency debt exposure shapes household adjustment to a large exchange rate depreciation. Using household survey and bank customer data during Hungary's 2008 currency crisis, we find that foreign currency borrowers cut consumption one-for-one with increased debt service, consistent with a foreign currency Fisher channel. Both the quantity and quality of expenditures decline, indicating a "flight from quality." Debt revaluation has a limited effect on overall labor supply, but there is substitution toward foreign income and home production. Our findings point to the relevance of open-economy models with incomplete markets, heterogeneous foreign currency exposures, and liquidity constraints. |
| JEL: | D12 E20 E3 F3 F30 F31 F34 G01 G5 G51 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34234 |
| By: | Adrian Ifrim; Robert Kollmann; Philipp Pfeiffer; Marco Ratto; Werner Roeger |
| 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. |
| Date: | 2025–07–16 |
| URL: | https://d.repec.org/n?u=RePEc:eca:wpaper:2013/394303 |
| By: | Carol Bertaut; Ester Faia; Ṣebnem Kalemli-Özcan; Camilo Marchesini; Simon Paetzold; Martin Schmitz |
| Abstract: | We use administrative security-level data from the U.S. and Euro Area (EA) portfolios to estimate asset demand and supply elasticities by exploiting exogenous variation in bond-specific currency wedges. Employing a Bartik-style shift-share identification approach, we document extensive heterogeneity in investor demand responsiveness to exogenous changes in the price of currency risk, conditional on the issuer characteristics. Demand for AE-bonds is always inelastic, whereas for EM-bonds, elasticity depends on investor type and currency: insurance/pension, nonbanks and banks have finite-elastic demand for EM-bonds that are issued in their own (investor) currency. For EM-issuer-currency bonds, only EA non-bank investors increase the share of these bonds in their portfolio when currency wedges widen, suggesting they accept higher currency risk for higher returns. In response, issuers adjust their supply endogenously: an exogenous increase of 8 basis point in currency wedges leads to a 0.26% decline in local currency bond issuance relative to GDP. We develop a theoretical framework where debt issuance decisions take into account heterogenous demand of investors in terms of their response to changes in the price of currency risk. |
| JEL: | F30 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34275 |
| By: | Kimberly A. Clausing (Peterson Institute for International Economics); Maurice Obstfeld (Peterson Institute for International Economics) |
| Abstract: | The year 2025 brought a remarkable shift in the role of tariffs in the US economy, as the Trump administration simultaneously escalated the use of broad tariffs and ensured that Congress enacted large income tax cuts. This fiscal switch has important implications for the US tax system. While maintaining tariff rates at summer 2025 levels would generate large government revenues, such broad tariffs have significant downsides: Efficiency losses would approach one-third of revenues raised, the tax system would be less progressive, and there would be serious tax administration concerns. The fiscal shift also has significant macroeconomic implications, although probably not the intended ones. Broad tariffs generate a large negative supply shock, simultaneously raising prices and reducing macroeconomic activity. |
| Keywords: | Tariffs, revenue, deadweight loss, optimal tariff, pass-through, rentseeking, retaliation, redistribution, industrial policy |
| JEL: | F13 F32 F38 F42 F52 H21 H23 H26 H68 L52 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:iie:wpaper:wp25-19 |
| By: | Charlie Joyez (Université Côte d'Azur, GREDEG, CNRS, France) |
| Abstract: | We study how disruptions propagate through global value chains and how network structure conditions their e ects. Using Eora country-industry data for 189 countries and 26 industries (1996-2015), shocks are defined by a distribution-based rule; exposure counts disrupted upstream/downstream partners, and redundancy counts non-disrupted pre-existing links. We estimate fixed-e ects impact models - where robustness is smaller contemporaneous deterioration conditional on exposure - and a grouped-time complementary log-log hazard - where resilience is faster return to the pre-shock level. Two findings emerge. First, exposure propagates, depressing output, value added, and exports and slowing recovery. Second, redundancy mitigates, offsetting the impact and raising the recovery hazard. As an illustration, high-technology activities appear less sensitive on impact and recover faster than low-technology ones, with the advantage explained by higher redundancy despite deeper connections. These results suggest strengthening robustness and resilience by deepening GVC integration through strategic redundant linkages, rather than retreating from openness. |
| Keywords: | Global Value Chains, Business cycle shocks, High-Technology |
| JEL: | F14 F15 F44 |
| URL: | https://d.repec.org/n?u=RePEc:gre:wpaper:2025-36 |
| By: | Friederke Niepmann; Leslie Sheng Shen; Friederike Niepmann |
| 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 affiliates---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 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12145 |
| By: | Jouvanceau, Valentin; Darracq Pariès, Matthieu; Dieppe, Alistair; Kockerols, Thore |
| Abstract: | This paper examines the macroeconomic impact of substantial tariffs imposed by the second Trump administration on imports from China and the euro area and their transmission through direct and indirect channels. Using the ECB-Global 3.0 semi-structural model, we show that tariffs raise US import prices and lead to tighter US monetary policy, with the managed float of the renminbi partly offsetting adverse effects in China, while appreciation of the dollar undermines US export competitiveness. In the euro area, euro depreciation provides limited output support but intensifies imported inflation and triggers additional policy tightening. We assess the sensitivity of these results to key assumptions, such as the global amplification of inflation via dominant US dollar invoicing, partial trade diversion, and alternative monetary policy frameworks that attenuate monetary tightening and output contraction. Quantitative assessments of tariffs enacted up to 26 May 2025 and of an escalation scenario indicate significant global output losses and heightened inflationary pressures, requiring widespread policy rate increases. Further escalation of the trade conflict magnifies these effects. These findings quantify the economic cost of tariff related trade disputes and highlight the challenges central banks face in navigating the trade off between price stability and growth. JEL Classification: F12, F41, F42 |
| Keywords: | dominant-currency pricing, open-economy, semi-structural model, tariffs |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253117 |
| By: | Daiya Mita (Nomura Asset Management Co. Ltd.); Taiga Saito (Graduate School of Economics, Hitotsubashi University); Akihiko Takahashi (Faculty 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 preferences 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 crosscountry 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 twocountry, two-currency version of the model to Japanese and U.S. market data (equity index futures, shortterm 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. |
| Keywords: | multi-currency equilibrium model, incomplete market, subjective beliefs, multi-asset investment, state-space model |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:tky:fseres:2025cf1257 |
| By: | Anna Florio; Daniele Siena; Riccardo Zago |
| Abstract: | This paper studies how participation and position in Global Value Chains (GVCs) affect the slope of the Phillips Curve (PC) and, consequently, the ability of monetary policy to control inflation. Using data from the European Monetary Union (EMU) and value added measures of GVCs, we show that, beyond the role of trade openness, higher participation leads to a flatter PC. This evidence is consistent with the theoretical literature emphasising how globalisation can reduce the sensitivity of prices to unemployment due to stronger strategic complementarities, to higher market power and to imperfect exchange rate pass through. On the other hand, the role of GVC position is not statistically significant. |
| Keywords: | Monetary Policy, Global Value Chains, Phillips Curve, Price Stickiness, Variable Markups |
| JEL: | E32 F41 F62 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:970 |
| By: | Mulabdic, Alen; Yotov, Yoto V. |
| Abstract: | This paper studies the impact of geopolitical risks on international trade, using the Geopolitical Risk (GPR) index of Caldara and Iacoviello (2022) and an empirical gravity model. The impact of spikes in geopolitical risk on trade is negative, strong, and heterogeneous across sectors. The findings show that increases in geopolitical risk reduce trade by about 30 to 40 percent. These effects are equivalent to an increase of global tariffs of up to 14 percent. Services trade is most vulnerable to geopolitical risks, followed by agriculture, and the impact on manufacturing trade is moderate. These negative effects are partially mitigated by cultural and geographic proximity, as well as by the presence of trade agreements. |
| Date: | 2025–09–23 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:11219 |
| By: | Anna Lipinska; Enrique Martínez García; Felipe Schwartzman |
| Abstract: | This paper examines the drivers of the 2020–23 inflation surge, with an emphasis on the similarities and differences across countries, as well as the role that monetary policy frameworks might have played in shaping central banks’ responses. The inflation surge in the U.S. and abroad was set in motion by two global events: the COVID-19 pandemic and Russia’s invasion of Ukraine. Pandemic-related supply disruptions, a rotation of consumer spending toward goods, and commodity price increases exacerbated by Russia’s invasion of Ukraine resulted in unusually large relative price increases, which required time to be absorbed. A simple Phillips curve framework suggests that the inflation surge was mainly driven by “cost push” factors, such as supply shortages and relative price shifts. Tight labor markets contributed to the persistence of above-target inflation. Despite differences in mandates of the monetary policy frameworks, central banks around the world responded similarly to recent global events. |
| Keywords: | international comparison; inflation; global shortages; aggregate demand; aggregate supply; commodity prices; Phillips curve; inflation expectations; monetary policy |
| JEL: | E31 E52 E58 F33 F40 |
| Date: | 2025–09–19 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:101768 |
| By: | Broadbent, Ben; Di Pace, Federico; Drechsel, Thomas; Harrison, Richard; Tenreyro, Silvana |
| Abstract: | The UK economy experienced significant macroeconomic adjustments following the 2016 referendum on its withdrawal from the European Union. To understand these adjustments, this paper presents empirical facts using novel UK macroeconomic data and estimates a small open economy model with tradable and non-tradable sectors. We demonstrate that the referendum outcome can be interpreted as news about a future decline in productivity growth in the tradable sector. An immediate fall in the relative price of non-tradable goods induces a temporary “sweet spot” for tradable producers. Economic activity in the tradable sector expands in the short run, while the non-tradable sector contracts. Aggregate output, consumption and investment growth decelerate. |
| JEL: | E32 F17 F41 F43 O16 |
| Date: | 2024–07–01 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:118569 |
| By: | Anna Lipinska; Enrique Martínez García; Felipe Schwartzman |
| Abstract: | This paper examines the drivers of the 2020-23 inflation surge, with an emphasis on the similarities and differences across countries, as well as the role that monetary policy frameworks might have played in shaping central banks' responses. The inflation surge in the U.S. and abroad was set in motion by two global events: the COVID-19 pandemic and Russia's invasion of Ukraine. Pandemic-related supply disruptions, a rotation of consumer spending toward goods, and commodity price increases exacerbated by Russia's invasion of Ukraine resulted in unusually large relative price increases, which required time to be absorbed. A simple Phillips curve framework suggests that the inflation surge was mainly driven by "cost push" factors, such as supply shortages and relative price shifts. Tight labor markets contributed to the persistence of above-target inflation. Despite differences in mandates of the monetary policy frameworks, central banks around the world responded similarly to recent global events. |
| Keywords: | International comparison; Inflation; Global shortages; Aggregate demand; Aggregate supply; Commodity prices; Phillips curve; Inflation expectations; Monetary policy |
| JEL: | E31 E52 E58 F33 F40 |
| Date: | 2025–08–22 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2025-71 |
| By: | Adrian Ifrim; Robert Kollmann; Philipp Pfeiffer; Marco Ratto; Werner Roeger |
| Abstract: | The Euro Area faces persistently weak productivity growth alongside a sustained trade surplus and a trendless real exchange rate. This column shows that persistent productivity growth differentials relative to the rest of the world, are a key driver of Europe’s external surplus. Structural trade shifts, such as declining home bias and falling import prices, have offset the appreciation pressures from the productivity-growth gap. Weak domestic investment is partly driven by global forces, highlighting the limits of purely demand-based explanations and associated policy prescriptions. |
| Keywords: | European Union, trade surplus, real exchange rate, productivity growth. |
| Date: | 2025–09–04 |
| URL: | https://d.repec.org/n?u=RePEc:eca:wpaper:2013/394306 |