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on Open Economy Macroeconomics |
| By: | Ms. Natasha X Che; Weining Xin; Taichi Yoshida |
| Abstract: | Using a small open economy overlapping generations model, this paper examines how AI can drive economic divergence across and within Asian economies. While AI adoption may promise sizable productivity gains, it could create temporary but potentially longlasting divergence across countries. Structurally-prepared advanced economies tend to adopt AI earlier and see immediate growth gains while emerging markets and developing economies (EMDEs) face delayed adoption and initial growth headwinds from rising costs of capital. Structural reforms that boost productivity and strengthen human capital not only accelerate adoption in EMDEs but also amplify the growth gains. Within countries, AI adoption could widen inequality along multiple dimensions: across skill groups, as high-skilled workers benefit disproportionately from complementarity with the more capital-intensive technology, and across generation, as the shift of national income toward capital favors asset-rich older households relative to younger workers who rely primarily on labor income. Redistributive policies can help mitigate these distributional pressures, though they entail equity efficiency trade-offs that vary with country-specific fiscal and demographic conditions. |
| Keywords: | Artificial Intelligence; Automation; Technological Change; Economic Divergence; Structural Reform; Inequality; Redistribution; Asia; Overlapping Generations Model; IMF working papers; equity-efficiency trade-off; growth gain; productivity gain; capital share; Capital productivity; Income; Income inequality; Global; Asia and Pacific |
| Date: | 2026–08–07 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/166 |
| By: | Mr. Etienne Vaccaro-Grange |
| Abstract: | Small open economies often anchor their exchange rate to a basket of foreign currencies, with weights typically set from trade shares or financial exposure. Such schemes ignore the heterogeneity of pass-through across currencies and the covariance structure of bilateral rates, and therefore do not minimize the volatility of imported inflation, the central bank’s mandate. This paper proposes a minimum-variance framework — formally analogous to a Markowitz portfolio problem in pass-through space — in which basket weights minimize the variance of exchange-rate-driven imported inflation, subject to a constraint that preserves the basket’s cumulative pass-through. Applied to the case of Fiji, an import-intensive island economy with a five-currency basket, the optimization reduces the variance of imported inflation by close to twenty percent, with results robust across alternative specifications. |
| Keywords: | currency basket; exchange rate pass-through; minimum-variance portfolio; small open economies; monetary policy |
| Date: | 2026–06–26 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/131 |
| By: | Malpass, David R. |
| Abstract: | This paper, based on the Stanley Fischer Memorial Lecture that the author delivered at the Annual Bank Conference on Development Economics (ABCDE) 2026, examines two structural impediments to broad-based economic development: dysfunctional central bank currency systems and inadequately resolved sovereign debt burdens. On currency, the paper argues that floating exchange rate regimes and multiple exchange rate systems—as practiced in countries such as Ethiopia, Nigeria, and Egypt—systematically transfer wealth from low-income wage earners to a narrow-privileged class, deepening poverty rather than alleviating it. Using Ethiopia as a central case study, the paper documents how successive devaluations have raised the national poverty rate from 33 percent in 2016 to a projected 43 percent by 2025, while eroding the real value of development assistance disbursed in local currency. The paper proposes that currency stabilization, low-cost digital payment infrastructure, and unsterilized central bank intervention offer a more direct path to rising median incomes than current IMF-endorsed exchange rate flexibility. On sovereign debt, the paper evaluates the performance of the G20 Common Framework and the Global Sovereign Debt Roundtable against the benchmark of the 1989 Brady Plan, finding that contemporary frameworks have generated intensive creditor engagement but minimal net present value reduction for debtor countrie s. Key failures identified include the absence of a single comparable discount rate for measuring debt relief, incomplete participation by China and commercial creditors, growing opacity in collateralized sovereign transactions, and the risks posed by value recovery instruments to the durability of restructuring agreements. The paper concludes that neither the Common Framework nor the Global Sovereign Debt Roundtable, in their current forms, are fit for purpose, and calls for replacement frameworks that prioritize measurable median income gains over creditor accommodation. Absent reforms on both fronts, per capita income growth in low-income developing economies is projected to remain at approximately 2 percent annually, leaving 5.6 billion people with incomes less than one-tenth of those in advanced economies and widening the global development gap. |
| Date: | 2026–07–20 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:11428 |
| By: | Huy Nguyen; Celine Thevenot |
| Abstract: | Fuel and food constitute significant portions of consumer baskets, yet their prices are highly volatile. The renewed energy price shock in March 2026, driven by geopolitical disruptions and supply constraints, has highlighted the macroeconomic and distributional importance of how international price shocks transmit to domestic markets. Spikes in these prices can have major social, political, and economic implications. The conventional policy approach is to allow domestic retail prices to align with international prices while protecting the most vulnerable. However, many countries intervene in price settings to shield their domestic markets from global fluctuations. This paper provides a comprehensive assessment of the passthrough from global to domestic retail prices for four commodities: gasoline, diesel, wheat, and rice over the past two decades in many countries. We employ a dynamic model of local projections building on the work of Kpodar and Abdallah (2017). Our findings indicate that average passthrough is incomplete, with fuel exhibiting higher and faster passthrough than food. The extent of passthrough varies by period, region, and between commodity exporters and importers. We also examine asymmetric responses to global price shocks and find evidence of a ratchet effect: price increases are more likely to be passed through than decreases. |
| Date: | 2026–07–17 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/148 |
| By: | Boris Hofmann; Aaron Mehrotra; Jan Paulick |
| Abstract: | The emergence of stablecoins has created a new channel to access US dollar liquidity in emerging market and developing economies (EMDEs), similar to the historical role of foreigncurrency deposits, or "deposit dollarisation". This has raised concerns about the possible implications for monetary control in EMDEs. Drawing on data on foreign currency deposits and dollar-pegged stablecoin inflows for more than 130 economies, we compare the dynamics and drivers of "stablecoin dollarisation" with those of conventional deposit dollarisation. We document that historical deposit dollarisation and recent stablecoin flows are both associated with similar macro-financial drivers, including the strength of exchange rate pass-through and sovereign or banking crises. We further document significant persistence in both deposit and stablecoin dollarisation, suggesting that dollarisation is hard to reverse once established. Unlike deposit dollarisation, stablecoin flows seem to be largely unaffected by either broad or specific capital flow restrictions. This likely occurs because stablecoins are partly circulating outside the regulatory perimeter. The historical record also suggests that moderate deposit dollarisation has been associated with somewhat higher inflation risks, although there is little evidence of significant impacts on monetary policy transmission. |
| Keywords: | dollarisation, capital flows, stablecoins, monetary control, EMDEs |
| JEL: | E44 E58 F32 F38 G15 G23 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1370 |
| By: | Kodjovi M. Eklou |
| Abstract: | Exchange rate movements have implications for the purchasing power of residents or voters. Given that the exchange rate is often seen as a barometer of government performance, there could be strong incentives to influence exchange rate valuation during elections. This paper investigates whether political economy factors affect Foreign Exchange Intervention (FXI) policy across countries. It investigates whether central banks tend to implement FX sales, leaning against depreciations, during electoral periods in a sample of 28 countries including both advanced (AEs) and emerging (EMs) economies over the period 2000-2019. The results show that EMs with competitive elections tend to implement more and larger FX sales in pre-electoral period, compared to post-election period, given their political popularity. Further, this result is driven by countries where political pressures on central bank governors are more prevalent. Furthermore, the paper also finds that monetary policy transparency has the potential to mitigate this politically driven FXI during electoral period. Finally, the paper discusses policy implications given that politically motivated FX sales could hamper the ability of central banks to effectively respond to large shocks. |
| Keywords: | Foreign Exchange Interventions; Electoral Cycles; Monetary Policy; Political Economy; Transparency. |
| Date: | 2026–06–26 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/130 |
| By: | Gabriel Montes-Rojas; Fernando Toledo; Juan Manuel Rodr\'iguez Repeti |
| Abstract: | This paper studies what happens when AI gets cheaper, with emphasis on the labor market outcomes, whether it creates formal jobs or whether it pushes workers into informality. We argue that the answer depends on the elasticity of substitution between imported AI capital and formal labor. We build a small open economy DSGE model with a dual labor market, imported AI capital, and country risk, calibrated to an economy where informality is pervasive. The same decline in AI prices produces sharply different labor-market outcomes depending on whether AI substitutes or complements formal workers. Under substitution, cheaper AI weakens formal labor demand and increases the role of the informal sector as an employment buffer. Under complementarity, it expands formal employment and amplifies output, wages, investment, and capital accumulation. The model therefore shows that AI can become either a source of displacement pressure or a driver of formal-sector expansion, depending on how it interacts with human labor. |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2607.15381 |
| By: | Christian Friedrich; Laura Zhao |
| Abstract: | In this paper, we examine the patterns and determinants of cross-border cryptocurrency flows. While our analysis focuses primarily on Bitcoin flows, the cryptocurrency with the largest market capitalization, we show that our key results also extend to four major stablecoins. After documenting global patterns of cross-border Bitcoin flows and contrasting them with those of traditional capital flows, we employ a cross-country panel approach to identify the key drivers of cross-border crypto flows for up to 162 countries. Our results provide evidence for the presence of multiple coexisting motives. The most significant motives comprise strategies to adjust to unfavorable macro and financial developments, as well as the need to conduct international payment and remittance transfers. Moreover, by conducting a case study of cross-border Bitcoin flows after the COVID-19 shock, we find that these motives were particularly relevant at a time when economic conditions were weak and the need for remittances appeared high. Gaining a better understanding of the motives behind cross-border cryptocurrency transactions is crucial for informing the public debate on cryptocurrencies and their potential use cases. |
| Keywords: | Money and payments, Digital assets and fintech |
| JEL: | E4 F3 F32 F38 F51 G15 G23 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:26-15 |
| By: | Marco Gallegati; William Ginn; Jamel Saadaoui; Solomos Solomou; Kun Tian |
| Abstract: | This paper studies whether global climate shocks are priced in global oil markets in a stable and homogeneous way. Using monthly data for 1983:03-2024:10, we estimate the response of real WTI spot and futures prices to phase-specific El Nino–Southern Oscillation (ENSO) anomalies. A Time-Varying Parameter Local Projection (TVP-LP) framework recovers horizon-specific coefficient paths, allowing transmission of the same measured anomaly to vary across historical market environments. ENSO transmission is asymmetric, time-varying, and spatially heterogeneous. El Nino anomalies lower real oil prices at six- to twelve-month horizons, whereas La Nina anomalies raise them. For futures prices, responses scaled to the sample means of the phase-specific absolute impulse variables-0.33 C for El Nino and 0.39 C for La Nina-imply declines of about 4.1-6.8 percent and increases of about 8.3-11.5 percent. Recent ENSO episodes generate more pronounced responses, consistent with stronger roles for climate information, futures-market expectations, inventories, and delayed supply-demand adjustment. Central-Pacific events, especially La Nina, are more inflationary than Easter-Pacific events, which are typically muted or deflationary. The findings imply that climate shocks are macro-financial risk factors in global oil markets, with implications for inflation, energy prices, and international risk transmission. |
| Keywords: | oil prices, oil futures, ENSO, climate risk, international transmission, time-varying local projections |
| JEL: | E31 F31 F36 G13 Q43 Q54 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-64 |
| By: | Hasan Dudu; Mr. Troy D Matheson; Mr. Dirk V Muir; Karmen Naidoo; Salem M Nechi; Mr. Pedro C Rodriguez |
| Abstract: | The changing global economic landscape is likely to expose the Middle East, North Africa, and Pakistan (MENAP) and Caucasus and Central Asia (CCA) regions to more frequent external shocks, putting a premium on resilient and flexible macroeconomic policy frameworks. By using empirical analysis and model-based scenarios, this paper highlights the important roles of policy frameworks in stabilizing MENAP and CCA economies against adverse global shocks. Two messages stand out from the analysis. First, as countries make progress toward diversifying their exports and deepening domestic financial markets, credible inflation-targeting monetary policy regimes that allow greater exchange rate flexibility could enable faster adjustment to adverse global shocks. Second, adopting strong fiscal rules could help better anchor long-term expectations, reduce risk premiums, and help support countercyclical fiscal responses. |
| Keywords: | Shocks; Macrodynamics; Fiscal; Monetary; Policy Frameworks |
| Date: | 2026–07–03 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/138 |
| By: | Crozet, Matthieu; Hinz, Julian; Šváb, Patrik |
| Abstract: | Trade sanctions are restrictive measures that limit commercial exchange between countries to achieve political objectives. Their economics can be studied at two levels-the aggregate effects on trade and welfare, and the adjustment of individual firms-with the sanctions imposed on the Russian Federation in 2014 and 2022 as central case studies for both. At the macro level, a multi-country, multi-sector general-equilibrium trade model with input-output linkages is calibrated to quantify welfare effects under alternative coalition and intensity scenarios. Relative to 2014, the 2022 measures imposed substantially larger costs on Russia (about -2.6% of real income) while the average cost for EU/UK senders remained modest (around -0.1%), with larger losses concentrated in highly exposed small economies. Coalitions amplify pressure on the target at limited additional cost for most senders. Hypothetical extensions bound the potential of sanctions through global participation or embargoes. At the micro level, French customs data (monthly firm-product-destination flows, 2021-2023) and a triple-difference design reveal that exports to Russia fell by roughly three quarters after February 2022. The adjustment is dominated by the extensive margin, with smaller but significant intensive-margin declines among continuing firms. Targeted products contracted far more than non-targeted ones, with dual-use goods most severely affected. Financial channels that propagate losses beyond listed goods, the limits of "smart" sanctions when governments shield strategic firms, and political responses-including rally-around-the-flag effects in the targeted country-complete the picture. |
| Keywords: | economic sanctions, trade sanctions, international trade, embargo, export controls, Russia, extensive margin, welfare |
| JEL: | F13 F14 F51 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ifwkwp:342567 |
| By: | Alberto Cavallo; Olena Kostyshyna; Oleksiy Kryvtsov; Matías Vieyra |
| Abstract: | How do import tariffs affect retail prices? We combine daily product-level posted prices from seven major Canadian retailers with product-level tariff exposure to estimate tariff effects in a difference-in-differences framework. Prices of tariffed goods rose gradually, peaking at 6% after three months, implying pass-through of roughly one quarter of the 25% tariff. We find little spillover to untariffed substitutes and a rapid reversal of price effects after tariff removal. Adjustment occurred mainly through the frequency of price changes. Pass-through shifted with trade-policy news and was larger for products labeled “Tariffed”, showing that tariff-induced inflation depends on policy expectations and tariff salience. |
| Keywords: | Monetary policy, Inflation dynamics and pressures |
| JEL: | E31 F13 E52 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:26-22 |
| By: | Rashid Mirzaakhmedov (The Central Bank of Uzbekistan) |
| Abstract: | This paper examines how foreign ownership of importing firms shapes exchange rate pass-through (ERPT) to import prices in Uzbekistan across three distinct monetary policy regimes. Using transactionlevel customs data matched with a firm ownership registry, I find that ERPT remained near-complete before inflation targeting but declined sharply following its formal adoption in October 2019. Foreignaffiliated importers exhibit significantly lower pass-through than domestically owned firms under inflation targeting, with the gap most pronounced for capital and intermediate goods. Rolling window estimation reveals that foreign affiliates adjusted more rapidly to the new monetary framework, suggesting that ownership structure and institutional credibility jointly shape import price dynamics. The results provide micro-level evidence that the central bank’s credibility has weakened the exchange rate channel of inflation, while the growing presence of foreign affiliates reduces the effectiveness of exchange rate depreciation as an instrument for correcting the trade balance. |
| Keywords: | Exchange Rate Pass-Through; Import Prices; Foreign Ownership; Inflation Targeting; Transaction-level Customs Data; Uzbekistan |
| JEL: | F31 F14 E31 F23 E52 |
| Date: | 2026–08–07 |
| URL: | https://d.repec.org/n?u=RePEc:gii:giihei:heidwp22-2026 |
| By: | Hasan Cetin; Mr. Sanan Mirzayev |
| Abstract: | We examine market entry and post-entry debt dynamics in Frontier Economies by grouping countries based on durability of market access using a two-step framework combining first Eurobond issuance with the reliance on private external creditors, validated through an unsupervised K-mean clustering. A discrete-time event LOGIT model finds that favorable global liquidity conditions and investor appetite open issuance windows for countries, but domestic pull factors—income, institutions, growth, and reserve buffers—ultimately determine success of market entry. Post-entry, Frontier Economies shift rapidly toward market borrowing, with looser fiscal stance as new financing source is unlocked. Along increased exposure to rollover and global financial cycle risks, debt decomposition exercise shows a worsening interest–growth differential and rising debt, driven mainly by primary deficits and higher interest burdens. Results underscore the need for credible medium-term fiscal frameworks, stronger debt management, and reserve buffers to manage the transition to market financing. |
| Keywords: | Market Access; Frontier Economies; Debt Dynamics; Debt Sustainability; Debt Sustainability Framework |
| Date: | 2026–07–17 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/153 |
| By: | Emanuel Kohlscheen; Aaron Mehrotra |
| Abstract: | We provide new evidence on the drivers of the pass-through of exchange rate movements into consumer prices across four decades and close to a hundred countries, combining econometrics and random forests. Random forests are particularly useful for modelling highly non-linear relationships, as well as for identifying the relative importance of the different theoretical factors that can affect the degree of pass-through. We find that the size of the economy, which tends to be related to the extent of pricing-to-market, and the level of inflation emerge as the factors most strongly associated with exchange rate pass-through, followed by product homogeneity and the volatility of the exchange rate. As we show, several of these covariates display a non-linear relation with exchange rate pass-throughs. We also document important implications of macroeconomic policy regimes and outcomes, including those related to fiscal policy, for exchange rate pass-through. |
| Keywords: | inflation, exchange rate pass-through, Phillips curve |
| JEL: | E30 E31 E58 F31 F41 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1371 |
| By: | Carmen Rojas (Central Reserve Bank of Peru); Bruno Gonzaga (Central Reserve Bank of Peru) |
| Abstract: | Building on the Competitor-Based Real Exchange Rate (CBRER) proposed by Gonzaga and Rojas (2026), this paper develops an External Trade Competitiveness Index (ETCI) that provides a more accurate measure of Peruvian export competitiveness. Unlike the Multilateral Real Exchange Rate (TCRM) –a traditional REER measure–– published by the Central Reserve Bank of Peru, the ETCI is constructed from product- and destination-level export unit values and explicitly accounts for competition in third markets. The framework is further improved through a systematic treatment of unit value bias. A two-stage identification procedure first detects structural product heterogeneity using fixed-effects models and then assesses whether changes in tariffsubheading composition generate economically meaningful distortions in aggregate unit values. Affected products are subsequently corrected using two strategies recommended by the International Monetary Fund: increasing product granularity and trimming extreme observations. The corrected ETCI indicates a cumulative gain in export competitiveness of 3.7 percents between 2000 and 2024, in sharp contrast with the 6.7 percents cumulative loss implied by the conventional REER. Compared with previous versions, the proposed refinements moderate the measured competitiveness gains while preserving their overall economic interpretation. Finally, validation and robustness exercises show that the ETCI captures both the structural and cyclical dimensions of export competitiveness and remains robust under alternative weighting schemes. |
| Keywords: | export competitiveness; third-market competition; unit values; real exchange rate; competitorbased indices |
| JEL: | F14 F31 C43 C23 |
| Date: | 2026–08–03 |
| URL: | https://d.repec.org/n?u=RePEc:gii:giihei:heidwp18-2026 |
| By: | Mr. Kangni R Kpodar; Alassane Drabo; Carine Meyimdjui |
| Abstract: | This paper investigates the impact of natural disasters on the domestic sovereign yield curve, shedding light on their distinct transmission channels. Using a sample of 72 developing countries during the period 2000-20, and leveraging a newly compiled dataset on domestic treasury bill and bond yields, the findings from the fixed-effects and the local projection difference in difference estimations point to a disaster premium in the pricing of domestic government securities. While natural disasters significantly steepen the yield curve, their effects are confined to short-term maturity debts. In constrast, a worsening in climate vulnerability shifts upward the entire yield curve. Heightened fiscal stress and monetary policy stance emerge as the main transmission channels. These results underscore the importance of integrating resilience building into debt management and fiscal policy frameworks. |
| Keywords: | Natural disasters; sovereign risk; yield curve |
| Date: | 2026–07–03 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/139 |
| By: | Cristian Alonso; Tristan Hennig; Henry Hoyle; Haibo Li; Monica Petrescu; Ying Xu; Yizhi Xu |
| Abstract: | Asia-Pacific has undergone a profound transformation over the past few decades, increasing its share in global trade and GDP. This paper assesses to what extent Asia-Pacific’s role in global finance has expanded commensurately and whether it has become more integrated by systematically analyzing crossborder financial data. We combine descriptive analyses of past trends in financial positions with network analysis to understand how inter- and intra- regional financial linkages have evolved for economies in the region. We find that Asia-Pacific’s role in global finance still significantly lags its role in global trade and that there is considerable heterogeneity within the region. Advanced economies in the region are well integrated into global financial markets, whereas most emerging markets exhibit more limited integration. Financial integration within the region is also low but diverges significantly by instrument. Intra-regional financial integration is advancing in foreign direct investment (FDI) and cross-border banking (the latter from low levels), but has remained limited in foreign portfolio investment (FPI). Gravity model analysis indicates a significant association between trade and FDI, but not between trade and FPI. We conclude the paper with policy recommendations to promote resilient financial integration in Asia-Pacific. |
| Keywords: | Financial integration; Foreign direct investment (FDI); Foreign portfolio investment (FPI); Cross-border banking; Gravity models; Network analysis |
| Date: | 2026–07–17 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/154 |
| By: | Twizeyimana, Leonard; Avileis, Felipe Grimaldi |
| Abstract: | This paper examines the transmission mechanism through which exchange rate fluctuations in the Brazil Real (BRL) influence the global benchmark price of soybeans. Using an Instrumental Variables (IV) approach with 5-year sovereign credit default swap (CDS) spreads, the empirical design isolates exogenous movements in the Brazilian Real exchange rate. Results demonstrate that a 1% depreciation of the Brazilian Real against the US dollar leads to a 0.51% decline in global soybean futures prices. The magnitude of the pass-through is a function of a country's short run supply elasticity and global production share, which we classify as the country's ability of exerting short-hedging pressure in futures markets. We confirm this by running the same model on cocoa futures, in which Brazil is a small and inelastic producer, and showing that there is no price response after a currency shock. Altogether, our findings complement the dominant currency paradigm literature (Gopinath et al, 2016) by highlighting that bilateral exchange rates of large producers can affect commodity prices, regardless of the currency the product is invoiced. For global agricultural producers, these findings highlight a significant source of market risk that must be taken into account, especially in countries with high levels of political and fiscal risk. |
| Keywords: | Demand and Price Analysis, International Relations/Trade |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ags:asea26:404826 |
| By: | Seungduck Lee; Angelo Ranaldo; Tomohiro Tsuruga |
| Abstract: | Settlement risk is a central friction in currency markets. We provide causal evidence on its pricing by exploiting Hungary's 2015 adoption of CLS, which introduced payment-versus-payment settlement, sharply reducing settlement risk. Using a difference-in-differences design, we find that currency excess returns decline by about ten basis points after CLS adoption, consistent with lower compensation for bearing settlement risk, while exchange rate volatility also falls. Deviations from triangular arbitrage conditions narrow, indicating a reduction in the effective cost of arbitrage and improved market efficiency. Additional evidence based on U.S.-specific holidays supports a mechanism operating through time-zone exposure. Our findings show that settlement risk is a priced friction and a source of limits to arbitrage in currency markets. |
| Keywords: | Foreign exchange; Settlement risk; Market microstructure; Payment-versus-payment; Limit to arbitrage |
| Date: | 2026–07–24 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/156 |
| By: | Stefan Avdjiev; Bryan Hardy; Maximilian Jager |
| Abstract: | This paper documents that the traditional sovereign-bank nexus has morphed into a broader nexus that now also includes non-bank financial institutions (NBFIs): the sovereign-bank-NBFI nexus. The classical sovereign-bank nexus has been a major financial stability concern following the eurozone crisis. Since then, sovereign debt levels have increased substantially in many major economies, while NBFIs' footprint in sovereign bond markets has grown significantly. This paper examines the transmis sion of risks among banks, sovereigns and NBFIs using European bank-level data and global country-level data. We find that banks' direct sovereign exposures have recently become less important in explaining the co-movement between bank and sovereign risk. By contrast, banks' exposures to NBFIs have become a significant determinant of the bank-sovereign risk co-movement. We also find evidence that NBFIs' sovereign debt holdings have become important drivers of the co-movement between NBFI and sovereign risk. |
| Keywords: | banks, sovereign default, feedback loop, NBFI, nexus, risk |
| JEL: | F34 G01 G21 G23 H63 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1369 |
| By: | Younes Takki Chebihi; Naoya Kato; Maxwell Kushnir; Andreja Lenarcic; Yinhao Sun; Mr. Bilal Tabti |
| Abstract: | Frontier Market (FM) status serves as a steppingstone for Low-Income Countries (LICs) aspiring to become Emerging Markets (EMs). Since the concept first emerged over three decades ago, FMs have gained substantial investment appeal, particularly after the 2008 Global Financial Crisis. At the same time, the recent series of global shocks starting with the COVID-19 pandemic highlighted the countries’ persistent vulnerabilities. This paper seeks to deepen our understanding of FMs by offering new analysis on the determinants of frontier market status and, using a dynamic country sample, examining the factors that help LICs attain and lose FM status. It finds that building robust macroeconomic fundamentals and ensuring good governance are critical for becoming an FM. In addition, the paper identifies flexible exchange rates, substantial official reserve buffers, and relatively low public debt and deficit levels as key contributors to lessening the sensitivity of FMs’ sovereign spreads to changes in global financial conditions. |
| Keywords: | Frontier Markets; Sovereign Spreads; Market Access; U.S. Monetary Policy Spillovers |
| Date: | 2026–07–03 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/140 |
| By: | Fernando Toledo; Luis Dimotta Br\'e; Gabriel Montes-Rojas |
| Abstract: | This paper examines how algorithmic and AI-driven fund management shapes the international transmission of U.S. monetary policy to emerging markets. It argues that the key source of instability is not algorithmic intermediation itself, but the similarity of models across funds. When algorithms rely on similar signals and make correlated errors, their trades reinforce one another and intensify capital-flow responses during periods of stress. When models are diverse, errors offset each other and algorithmic investors can stabilize flows. The paper develops a two-region macro-financial framework and tests its central prediction using equity portfolio flows to nineteen emerging markets from 2000 to 2024. The evidence shows that algorithmic herding amplifies outflows after U.S. monetary shocks only in high-volatility regimes, while faster adjustment alone has no comparable effect. The results imply that policy should focus on preserving model diversity rather than limiting the size of non-bank intermediation. |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2607.15385 |
| By: | Fredy Gamboa; Jose Vicente Romero |
| Abstract: | This study examines how geopolitical risk (GPR) transmits to sovereign credit risk in emerging market economies (EMEs), using monthly data on the 5-year sovereign credit default swap (SCDS) and the J.P. Morgan Emerging Markets Bond Index (EMBI) spread for 13 EMEs over the period of January 2005–October 2025. Using fixed-effects panel local projections, the framework is extended to allow for state-dependent transmission. Differences in impulse responses across states are attributed to specific macrofinancial fundamentals. Three main findings are identified. First, an increase in the GPR index raises both SCDS and EMBI spreads. Second, disaggregating the index into its subcomponents reveals a larger response to threats than to acts, consistent with the possibility of anticipation effects in sovereign credit markets. Third, evaluating the state-dependent impulse response around the Russian invasion of Ukraine yields substantially different responses, with the post-invasion configuration increasing the sovereign risk premia response. Our findings show the importance of modeling the state-dependent transmission of geopolitical shocks and provide a useful tool for incorporating geopolitical scenarios into sovereign risk analysis. |
| Keywords: | sovereign risk, credit default swaps, EMBI, emerging markets, geopolitical risk, panel local projections, state-dependent transmission |
| JEL: | C23 C54 F34 G15 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1368 |
| By: | Glebocki, Helena (Fairfield University); Simpson, Nicole (Colgate University); Alarcon Vaca, Felipe (Colgate University) |
| Abstract: | This paper analyzes the macroeconomic push–pull determinants of bilateral remittance flows among 33 pairs of Latin American countries using quarterly data between 2005 and 2023. We apply a panel Autoregressive Distributed Lag (ARDL) framework combined with a Poisson Pseudo Maximum Likelihood (PPML) gravity model specification, distinguishing between short-run dynamics and long-run equilibrium relationships. The results show strong evidence of long-run cointegration between remittance flows and macroeconomic fundamentals. Among the determinants, GDP at origin emerges as the most important driver: stronger economic performance in the origin country is associated with significantly higher eemittance flows, suggesting that remittance-sending capacity increases during periods of economic expansion. GDP in the destination, or remittance-receiving, country is a critical driver of short-run remittance flows between countries. Inflation at origin leads to lower remittances flows in the long-run, but has no short-run impact. Overall, macroeconomic push–pull factors shape remittance corridors primarily through long-run structural channels rather than short-term cyclical fluctuations. |
| Keywords: | remittances, emerging markets, international flows |
| JEL: | F31 F42 F65 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18829 |