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on Open Economy Macroeconomics |
| By: | Arce, Fernando; Bengui, Julien; Bianchi, Javier |
| Abstract: | We propose a macroprudential theory of foreign reserve accumulation that can rationalize the secular trends in public and private international capital flows. In middle-income countries, the increase in international reserves has been associated with elevated private capital inflows, both in the aggregate and in the cross-section, and economies with a more open capital account have accumulated more reserves. We present an open economy model of financial crises that is consistent with these features. We show that optimal reserve management policy leans against the wind, raising gross private borrowing while improving the net foreign asset position and reducing exposure to crises. |
| Keywords: | Macroprudential policy;International reserves;Financial Crises;Gross capital flows |
| JEL: | E58 F31 F32 F34 F51 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:14336 |
| By: | Nicolas M. Burotto |
| Abstract: | The author develops a dynamic macroeconomic model of a small open economy to identify two key vulnerabilities that prevent emerging markets from fully integrating into global markets: high financial integration costs and their low position in the international monetary hierarchy. These vulnerabilities make them susceptible to financial traps, jeopardize debt sustainability, and increase volatility. He shows that the weak response of capital flows to interest rates further limits the ability of monetary policy to stabilize the system. As a result, these economies have restricted policy options and often resort to mimicking external monetary policy strategies in times of financial distress. |
| Keywords: | external debt sustainability; currency hierarchy; financial trap; balance of payments constraint; subordinated integration |
| JEL: | E12 E32 E44 F34 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:lev:wrkpap:wp_1087 |
| By: | Itskhoki, Oleg; Mukhin, Dmitry |
| Abstract: | Trade wars and financial sanctions are again becoming an increasingly common part of the international economic landscape, and the dynamics of the exchange rate are often used in real time to evaluate the effectiveness of sanctions and policy responses. We show that sanctions limiting a country’s exports or freezing its assets depreciate the exchange rate, while sanctions limiting imports appreciate it, even when both types of policies have exactly the same effect on real allocations, including household welfare and government fiscal revenues. Beyond the direct effect from sanctions, increased precautionary savings in foreign currency also depreciate the exchange rate when they are not offset by the sale of official reserves or financial repression of foreign-currency savings. We show that the dynamics of the ruble exchange rate following Russia’s invasion of Ukraine in February 2022 are quantitatively consistent with the combined effects of these forces calibrated to the observed sanctions and government policies. We evaluate the associated welfare, fiscal and inflationary consequences for both Russia and the coalition of Western countries. |
| Keywords: | trade sanctions; financial sanctions; financial repression; FX market |
| JEL: | E50 F31 F32 F41 F51 |
| Date: | 2025–10–25 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:129422 |
| By: | Ifrim, Adrian; Kollmann, Robert; Pfeiffer, Philipp; Ratto, Marco; Roeger, Werner |
| 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: | Euro Area, Trade Balance, Real Exchange Rates, Productivity Growth Gap |
| JEL: | E2 E3 F3 F4 |
| Date: | 2025–09–04 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:126077 |
| By: | Reinhold Heinlein (Bristol Business School, University of the West of England); Gabriella D. Legrenzi; Scott Marc Romeo Mahadeo (Department of Economics, University of Reading) |
| Abstract: | We empirically assess the interlinkages between sovereign risk, measured in terms of CDS spreads, and exchange rates for a sample of emerging markets. Our period of analysis includes episodes of severe stress, such as the Global Financial Crisis, the COVID-19 pandemic, and the Ukrainian War. Exploiting recent developments in local Gaussian partial correlation analysis and the associated nonlinear Granger causality tests, we are able to uncover linkages between assets across different segments of their joint distributions. Disentangling the effect of global factors, we show that the information on sovereign risk of other emerging economies is more relevant for the sovereign risk-exchange rate relationship than the state of developed markets risk for all countries in our sample and for all segments of the assets distribution. The same considerations apply for the movements of the US dollar relative to other currencies, where changes in emerging market currencies is of particular interest. Nonlinear Granger causality tests show bi- directional causality for most countries, confirming the importance of multiple transmission channels. Taken together, our results highlight the importance of understanding the interlinkages between sovereign risk and exchange rates across their entire joint asset returns distribution, which can guide policymakers in debt and currency management, with coordinated regional responses potentially proving more effective than individual national actions. In terms of portfolio management, our documented bidirectional causality offers valuable insights into predicting currency fluctuations based on sovereign risk, supporting hedging and investment strategies in periods of financial stress. |
| Keywords: | CDS, correlation, emerging markets, exchange rate, nonlinear causality, sovereign risk |
| JEL: | F31 G15 |
| Date: | 2025–11–01 |
| URL: | https://d.repec.org/n?u=RePEc:rdg:emxxdp:em-dp2025-03 |
| By: | Barry Eichengreen; Raul Razo-Garcia |
| Abstract: | In a paper 20 years ago, we analyzed the evolution of the international monetary system over the preceding 20 years and projected its evolution 20 years into the future, on the assumption of unchanged transition probabilities. Here we compare those projections with outcomes and provide new projections, again 20 years into the future. Although the world as a whole has seen financial opening and movement away from intermediate exchange rate regimes, as projected, movement has been slower than projected on the basis of observed transition probabilities in the 20 years preceding our forecast. New projections again based on unchanged transition probabilities but allowing countries to shift between advanced, emerging and developing country groupings and reclassifying exchange rate regimes to accord with current practice again suggest that policy regimes will be modestly different in 2045 than today. There will be a continued decline in intermediate exchange rate arrangements, and gains for hard pegs, as emerging markets move in this direction, and for more freely floating rates, driven by developing countries. There will be a further increase in the share of countries with open capital accounts, driven by emerging markets and developing countries. |
| JEL: | F0 F33 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34416 |
| By: | Petrella, Ivan; Juvenal, Luciana; Di Pace, Federico |
| Abstract: | Consensus holds that Emerging Markets and Developing Economies (EMDEs) engage in procyclical fiscal behavior. We emphasize that considering conditional responses to macroeconomic shocks is crucial when evaluating fiscal cyclicality, as neglecting this can result in significant biases. This study investigates the effects of exogenous commodity price shocks on fiscal variables in EMDEs by exploiting major narrative episodes and the heterogeneous exposure of countries to these shocks. Our results reveal that, following an expansionary shift in the terms of trade, fiscal authorities raise government spending and moderately increase taxes. The overall fiscal stance mitigates the effect of commodity price booms while leading to an improvement in the primary balance. These findings contrast with conventional wisdom but align with the optimal policy response to export price shocks predicted by a multi-good small open economy model with incomplete financial markets. We also highlight the role of institutional quality in shaping fiscal policy responses. |
| Keywords: | Fiscal policy;Commodity Prices;Emerging Market and Developing Economies;Optimal Policy |
| JEL: | F41 F44 E32 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:14347 |
| By: | Michelle Majid (Department of Economics, University of Reading); Akeem Rahaman (independent researcher, Trinidad and Tobago); Scott Marc Romeo Mahadeo (Department of Economics, University of Reading) |
| Abstract: | The migration literature shows that labour-seeking and remittance-driven motives are central determinants of movement, with identifiable push and pull factors shaping flows across countries. Yet, the role of foreign exchange (FX) availability remains unexplored despite its relevance in small, open economies. We address this gap by introducing the concept of currency- seeking migration, where limited access to convertible currency acts as a push factor and the ability to earn FX abroad functions as a pull factor. Using Trinidad and Tobago, a country facing protracted FX shortages, we estimate autoregressive distributed lag (ARDL) models using data from 1975 to 2016 and find a long-run relationship in which a decline in net official reserves reduces net migration, signalling greater emigration pressures. We also observe a slow error- correction process, indicating that there is a sluggish adjustment toward long-run equilibrium as pressures or short-run disturbances persist once triggered. Our results are robust across multiple specifications using different measures of FX positions. We recommend improving access to FX as an essential step to reduce emigration pressures, achievable in the short-run through export reform, via more targeted protectionist policies, and export diversification. This can assist in stabilising the external balance and pave the way for more long-term structural reforms through exchange rate liberalisation. |
| Date: | 2025–11–02 |
| URL: | https://d.repec.org/n?u=RePEc:rdg:emxxdp:em-dp2025-04 |
| By: | Giovanni Donato (Geneva Graduate Institute, International Economics) |
| Abstract: | This paper examines how international investment agreements constrain the use and effectiveness of capital controls in emerging and developing economies. Leveraging a novel database on the specific content of investment treaties, I identify those that include "macro-stability exceptions", which allow countries to derogate from their legal obliga-tions in times of crisis. Although theoretical models highlight the effectiveness of capital controls in moderating capital flows, empirical evidence remains inconclusive. I argue that this is partly due to the potential conflict between capital controls and countries' treaty commitments, and to the limited attention given to endogeneity bias in existing stud-ies. To address this identification challenge, I construct two indicators of policy space restriction and flexibility, reflecting the content of countries' investment agreements in force, which I use as instruments for capital controls on outflows. Instrumental Variable (IV) estimates reveal that capital controls have a statistically significant causal effect on sudden stops. However, the direction of the effect differs across investment types. More-over, countries with more restrictive treaty commitments are less likely to deploy capital controls, whereas those with greater policy space due to macro-stability exceptions use controls more extensively. |
| Keywords: | International Investment Agreements; Exceptions; Capital Controls; Sudden Stops; Instrumental Variable |
| JEL: | F32 F38 F42 G28 |
| Date: | 2025–11–04 |
| URL: | https://d.repec.org/n?u=RePEc:gii:giihei:heidwp17-2025 |
| By: | Roudy Sassine |
| Abstract: | Lebanon's longstanding fixed exchange rate regime collapsed in the wake of the country's 2019 financial crisis. This paper examines the underlying monetary factors that contributed to the collapse, offering a new policy framework based on a floating exchange rate system and detailing its superior qualities. However, the paper cautions against a hasty transition without strengthening economic fundamentals. Instead, it argues that transition should proceed first by adopting a managed float, during which the country can increase its fiscal space to enable increased investment in idle capacity and the productive sectors, balancing flexibility with financial stability. Further economic imperatives must be addressed before a fully floating regime can be adopted. The paper concludes by outlining a roadmap for a smooth transition from the fixed exchange rate to a managed float and finally to a fully floating system. |
| Keywords: | Financial crisis; Monetary policy; Monetary sovereignty |
| JEL: | F30 N10 N14 P16 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:lev:wrkpap:wp_1094 |