|
on Open Economy Macroeconomics |
| By: | Dong Cheng; Mario J. Crucini; Hanjo T. Kim |
| Abstract: | Aggregate real U.S. GDP fell by roughly 26 percent between 1929 and 1932, yet the severity of the Great Depression varied dramatically across states: CPI-deflated income per capita declined by 15 percent in Maryland but by 48 percent in South Dakota. To analyze this heterogeneity, we digitize Slaughter’s (1937) panel of state-by-sector production income for all 48 U.S. states and construct a novel set of sector- and state-specific deflators, allowing us to separate movements in physical quantities produced from the large relative price changes that occurred during the Great Depression. We then discipline a three-sector, 48-region dynamic spatial stochastic general equilibrium model and recover sequences of sector-state productivity shocks that exactly reproduce the observed sector-state quantity paths. The choice of deflators proves central, as correct deflation shifts the aggregate contraction away from agriculture and toward manufacturing while preserving idiosyncratic income variation across agricultural-dependent states. We further show that narratives based on common or even sector-specific shocks are inconsistent with the observed evolutions of state-level quantities and relative prices. Explaining the geography of the Great Depression therefore requires a high-dimensional sector-state shock structure. |
| JEL: | E32 F44 N12 R13 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35028 |
| By: | Jamel Saadaoui; Vanessa Strauss-Kahn; Jerome Creel |
| Abstract: | This paper investigates how geopolitical relationships shape Chinese exports, asking whether exporters systematically favor politically aligned countries - and whether that preference holds during periods of geopolitical turbulence. We leverage a unique high-frequency panel of over 17 million monthly firm-product-destination transactions from Chinese Customs (2000-2006), matched with the Political Relationship Index (𠑃𠑅ð ¼) developed by Tsinghua University, which captures monthly bilateral diplomatic relations from a Chinese perspective. Unlike most studies on geopolitics and trade, we move beyond the typical Western-centric lens of geopolitical risk and focus on export-side behavior. Our empirical strategy is robust: it combines rich fixed effects (firm-product, destination, time), sectorial tariff controls, and interactions with indicators of extreme positive and negative diplomatic events. Our results consistently show that stronger political alignment increases Chinese firms’ exports in both value and quantity. We also find evidence of non-linearity and asymmetric responses: exporters react more strongly to diplomatic improvements than to deteriorations. Using extreme geopolitical events, we show that positive events amplify the export response to political alignment, while negative events tend to dampen it. The patterns are strongest for foreign-invested firms and for differentiated products, suggesting that geopolitical alignment plays a critical role in global value chain dynamics. These findings contribute to understanding how firms incorporate political signals into trade decisions. In a world of growing political fragmentation, "friendtrading" is not just a policy discourse - it is reflected in the strategic behavior of exporters, even in the absence of formal sanctions. |
| Keywords: | international trade, firms' export, geopolitics, countries alignment |
| JEL: | F14 F13 F51 F23 D74 L25 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-22 |
| By: | Jess Benhabib; Feng Dong; Pengfei Wang; Zhenyang Xu |
| Abstract: | While standard sudden-stop models explain well the sharpness of financial crises, it remains challenging to account for the persistent growth stagnation that typically follows credit-driven capital account liberalizations in emerging markets. This paper presents a small open economy model with endogenous growth and borrowing constraints to ex- plain this phenomenon. The model highlights a valuation optimistic growth expectations, fueled by foreign credit with perfectly elastic supply, raise asset prices and relax liquidity constraints, inducing investment that validates the initial optimism. This positive feed- back loop generates multiple balanced growth paths and self-fulfilling cycles. However, in closed economies or with only FDI inflows, funding supply for investment is limited by consumption smoothing, dampening this feedback and leading to a unique growth path. Belief-driven regime switches can replicate crisis dynamics, including sharp drops in asset prices and growth. The framework also exhibits periodic orbits, producing endogenous deterministic fluctuations under perfect foresight. Countercyclical macroprudential measures can disrupt the detrimental feedback loop, while policies prioritizing FDI over credit prevent bad equilibria altogether, guiding the economy toward a stable, high-growth trajectory. |
| JEL: | E32 E44 F41 G01 G15 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35035 |
| By: | Ece Fisgin; Johannes Fleck; Keith Richards |
| Abstract: | We show that the EU's 2018 retaliation against US steel and aluminum tariffs targeted goods with low US import dependence and high substitutability. For the majority of tariffed goods, the US share of EU imports declined notably and remained below pre-2018 levels even after the retaliatory tariffs were lifted, reflecting asymmetric effects of tariffs on trade diversion. Moreover, although the retaliatory tariffs were instantly and fully passed through to EU importers, the retaliation did not lead to domestic price pressures as we find no evidence for inflationary effects on consumer and producer prices. |
| Keywords: | Trade policy; International trade; Prices |
| JEL: | E31 F13 F14 F42 F62 |
| Date: | 2026–03–20 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:102987 |
| By: | Andres Fernandez; Alejandro Vicondoa |
| Abstract: | We study the joint dynamics in the volume and prices of capital fows to emerging market economies (EMEs). A dynamic factor model augmented with sign and zero restrictions allows us to identify demand/supply shocks of idiosyncratic/common nature. While common credit supply shocks are the main driver of prices, idiosyncratic credit demand and supply shocks account for most of the variation in quantities. A structural multicountry SOE/RBC model is calibrated to EMEs data to further shed light on the main transmission channels. Augmented with correlated productivity and interest rate shocks, the model matches the comovement between prices and quantities as well as business cycle moments. Common credit demand drivers, captured as correlated TFP shocks, account for around half of the observed comovement in quantities but they are not a signicant driver of price comovement. Fundamentals matter signicantly more for capital flows than for country spreads, which are driven by a sizeable global financial cycle. |
| Keywords: | capital flows; sovereign spread; small open economy; credit supply; credit demand; external factors. |
| Date: | 2026–03–27 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/060 |
| By: | Pierre-Olivier Gourinchas; Gene Kindberg-Hanlon; Manasa Patnam; Lorenzo Rotunno; Michele Ruta |
| Abstract: | Global imbalances denote the distribution of countries’ current account balances, identically equal to the difference between two forward-looking aggregate variables: national savings and domestic investment. Industrial and trade policies have traditionally not been considered important drivers of aggregate savings or investment, and therefore of current account balances. The former because most industrial policies are small in scope; the latter because permanent tariffs have no intertemporal effect in the textbook model, with an offsetting appreciation of the real exchange rate. The rapidly growing use of both industrial and trade policies in recent years calls for a reassessment. This paper presents a framework to think about the role of both policies. For industrial policy, we make the important distinction between the traditional sector-specific policies via subsidies or other targeted instruments (‘micro IP’) and broader policies (‘macro IP’) that aim to promote industrial developments and competitiveness through the deployment of more aggregate instruments such as financial repression, foreign reserve accumulation, or capital controls. A key finding is that ‘micro IP’ tends to increase external balances if it fails to raise aggregate productivity. By contrast, ‘macro IP’ can, under some conditions, boost the current account, forcing other countries to adjust. Yet, these policies often come at the cost of suppressed domestic consumption and possibly domestic welfare. Our analysis confirms that tariffs are a weak tool to improve current account balances. Finally, traditional macroeconomic drivers—such as fiscal policy, demographics or credit cycles—remain critical drivers of global imbalances, especially for the US and China. |
| Keywords: | Global Imbalances; Tariffs; Industrial Policy. |
| Date: | 2026–04–06 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/067 |
| By: | Joshua K. Hausman; John V. Leahy; John Mondragon; Johannes Wieland |
| Abstract: | Nominal interest rates have real effects. Residential mortgages and other real world debt contracts require a sequence of constant nominal payments. Combined with payment-to-income constraints, these nominal payments force borrowers to take on less debt when nominal interest rates rise, regardless of the behavior of the real interest rate. Survey data shows that conditional on the real rate, higher nominal mortgage interest rates reduce home buying sentiment. And increases in nominal mortgage rates reduce mortgage origination more in cities where payment-to-income constraints are more likely to bind. We explore the macroeconomic implications of payment-to-income constraints in a new Keynesian model modified to include a credit good. The payment-to-income constraint amplifies the effect of current short-term nominal interest rates on output and inflation, making the model less forward-looking than the standard new Keynesian model. |
| JEL: | E4 E50 G21 R21 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35033 |
| By: | Nils M. Gornemann; Eugenio Rojas; Felipe Saffie |
| Abstract: | Does global financial risk affect long-run growth? Using a panel state-space model for emerging and advanced small open economies, we measure the effects of U.S. monetary policy uncertainty shocks. A one-standard-deviation shock lowers the level of the stochastic trend in emerging markets by at least 25 basis points after three years, with little effect in advanced economies. A small open economy model with growth through innovation and occasionally binding borrowing constraints explains this heterogeneity: higher interest-rate volatility depresses valuations, tightens collateral constraints, and slows innovation in equilibrium. A novel interaction between the occasionally binding constraint and stochastic volatility is key for our results. |
| Keywords: | Emerging market economies (EME); Dynamic stochastic general equilibrium (DSGE) models; Monetary policy; Productivity; Volatility |
| JEL: | F32 F41 G15 O16 |
| Date: | 2026–03–20 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:102989 |
| By: | Darracq Pariès, Matthieu; Jouvanceau, Valentin; Eyquem, Aurélien |
| Abstract: | We study how trade wars propagate to countries that are not directly targeted. We develop a three-country New Keynesian model with trade in final and intermediate goods, incomplete asset markets, and asymmetric monetary regimes, and quantify the spillovers of the 2025 U.S.-China tariff escalation to the euro area. A bilateral U.S.-China trade war generates large and asymmetric welfare losses for the U.S. and China, while the euro area benefits temporarily from trade diversion. Once tariffs extend to euro-area goods, third-country welfare flips into losses and the Chinese downturn deepens. Welfare-maximizing retaliatory tariffs by the euro area deliver only modest domestic improvements, at the cost of large additional losses for the U.S. and China. Overall, the global incidence of trade policy is intrinsically multilateral: third-country gains under bilateral protectionism are short-lived, reverse once protection broadens, and cannot be inferred from two-country analysis. JEL Classification: F30, F40, F41 |
| Keywords: | protectionism, third-country effects, trade wars |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263213 |
| By: | DENG, Yongheng; INOUE, Tomoo; NISHIMURA, Kiyohiko; SHIMIZU, Chihiro |
| Abstract: | Why have the world's most rapidly aging economies experienced decades of low inflation followed by emerging supply-side price pressures? We propose a mechanism based on the interaction between demographic change and the irreversibility of physical capital. In a three-generation overlapping-generations model with Calvo pricing and irreversible investment (Ii ≥ 0), durable capital built during the demographic bonus period cannot be rapidly scrapped when population declines, creating a prolonged overhang of productive capacity relative to demand. As depreciation gradually erodes this overhang and the labor force continues to shrink, the economy eventually transitions from structural excess supply to a supply-constrained regime. Reduced-form evidence from 38 economies over 1965- 2019 is consistent with the model's predictions: aging is associated with lower inflation, the Phillips curve slope declines with the elderly share, and countries that experienced migration-driven population reversals exhibit more stable slopes-patterns that the irreversibility mechanism can account for. We interpret the negative Phillips curve slope estimated for Japan after 2015 as suggestive of the onset of the supply-constrained phase, though causal identification remains an important limitation of the international panel design. |
| Keywords: | population aging, inflation, irreversible investment, overlapping generations, supply constraints, international panel data |
| JEL: | E22 E31 E52 J11 O41 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:hit:rcesrs:dp26-3 |