|
on Open Economy Macroeconomics |
| By: | Michael B. Devereux; Ippei Fujiwara; Camilo Granados |
| Abstract: | This paper explores the relationship between economic growth and the real exchange rate, specifically focusing on the convergence in price levels in Eastern European countries. While these countries have had significant convergence in GDP per capita (relative to the EU average) since the 1990s, convergence in real exchange rates for these countries stalled after the EU crisis. Using a standard theoretical framework, we estimate the main drivers of real exchange rates and show that a combination of productivity growth (Balassa-Samuelson effects) and labor market distortions help explain real exchange rate trends. We develop a structural two-country model that provides a rich decomposition of the long run determinants of the real exchange rate. Simulations based on observed sectoral productivities and labor market wedges show that the model can accurately account for the historical path of Eastern European real exchange rates, both before and after the EU crisis. |
| JEL: | F40 F41 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34183 |
| 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. |
| Keywords: | global growth divergences, trade balance, real exchange rate, estimated DSGE model, Euro Area, demand and supply shocks, persistent growth shocks |
| JEL: | F4 F3 E2 E3 C5 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-50 |
| By: | Ayca Topaloglu-Bozkurt; Tuba Pelin Sumer; Suheyla Ozyildirim |
| Abstract: | Using granular data from the Turkish banking system, we exploit a large currency depreciation in 2018 to explore whether, and how, banks’ cross-border FX borrowing evolved after the exchange rate shock. Our bank-level empirical findings show that a currency shock has a significant and negative impact on cross-border interbank FX borrowing, but the large foreign currency buffers held by banks mitigate the negative impact of the crisis on their FX borrowing. Furthermore, we find that the impact differs depending on the characteristics of the banks or the regional diversification of the lender banks. Sub-sample analysis via connectedness shows that the mitigating impact of an FX buffer is lower for strongly connected banks, while the analysis by business types indicates that the impact is higher for development banks. On the other hand, we find that the cross-border FX borrowing of resident banks decreases with the FX shock if the lender bank is located in advanced economies, but it increases if the lender banks are from emerging economies or the Middle East. Our results show the importance of diversification of funding partners to alleviate the negative impacts of an abrupt foreign currency depreciation on FX borrowing of the resident banks, i.e. to have a stable source of foreign exchange funding. |
| Keywords: | Cross-border FX borrowing, Currency shock, Connectedness, Diversification of Funding Partners |
| JEL: | G21 L14 F34 G15 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:tcb:wpaper:2513 |
| By: | Karlye Dilts Stedman; Andrew Hanson |
| Abstract: | Using high frequency data, we find that spillovers to the U.S. yield curve from the European Central Bank increased following the Global Financial Crisis, and strengthened when the U.S. normalized policy out of sync with other advanced economies. These spillovers were amplified by a contemporaneous waning in the ”convenience” of Treasuries. This provides evidence for a portfolio balance channel of transmission that is time-varying based on the non-pecuniary characteristics of Treasuries. We rationalize these facts using a two-country model of preferred habitat investors, where time-varying price-elasticity of demand for Treasuries gives rise to time-varying spillovers. |
| Keywords: | treasuries; Convenience yield; monetary policy; international spillovers; quantitative easing; quantitative tightening; preferred habitat |
| JEL: | E44 E52 F42 G12 |
| Date: | 2025–09–04 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedkrw:101728 |
| By: | Bearce, David H.; Garriga, Ana Carolina |
| Abstract: | This research note reconsiders the question of whether central bank independence (CBI) and fixed exchange rates (FIX) function as substitutes or complements. We argue that these monetary institutions have neither served as substitutes nor performed as complements for either inflation control or exchange rate stability. In terms of their substitutability, our statistical evidence shows that while CBI has been used for inflation control, FIX has been more directed towards exchange rate stability using updated datasets with these monetary institutions measured both on a de jure and de facto basis with nearly global country/year coverage from 1970 to 2020. In terms of their complementarity, our results also demonstrate that CBI was not more effective at reducing inflation when paired with greater FIX and FIX was not more effective at promoting exchange rate stability when paired with greater CBI. If anything, both are less effective when paired with the other monetary institution. These results suggest a “third generation” framework for studying CBI and FIX together with a focus on macroeconomic objectives beyond just domestic price stability. |
| Keywords: | central banks; central bank independence; exchange rate regimes; inflation; exchange rate stability |
| JEL: | E02 E31 E42 E43 E58 F31 |
| Date: | 2025–08–06 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125748 |
| By: | Kimiko Terai (Faculty of Economics, Keio University) |
| Abstract: | This study investigates interjurisdictional tax competition aimed at attracting foreign creditors' portfolio investments in sovereign bonds and corporate loans. In each of two jurisdictions with lower and higher capital, governments seek to maximize workers' expected utility by determining the volume of sovereign bond issuance to fund public inputs, the tax rate on creditors' interest income, and the extent of compliance with bilateral treaty provisions concerning the exchange of information on creditors' income. Under a bilateral treaty mandating only information exchange, the jurisdiction with initially lower capital tends to set a lower tax rate and exhibits less compliance effort, effectively functioning as a tax haven. Conversely, the jurisdiction with higher capital imposes a higher tax rate and demonstrates greater compliance, benefiting from the residence principle due to its substantial global interest income. Alternatively, under a bilateral treaty that includes provisions of both information exchange and withholding tax at the source for foreign creditors, the jurisdiction with lower capital sets a higher tax rate on domestic creditors and allocates more resources to public inputs than its wealthier counterpart, even at the risk of increasing sovereign default potential. These findings suggest that the specific design of international tax cooperation agreements significantly influences jurisdictions' fiscal behaviors, leading to divergent outcomes despite a shared objective of implementing residence-based taxation. |
| Keywords: | tax haven, interest income tax, sovereign default, Tax Information Exchange Agreement, Double Taxation Agreement |
| JEL: | H26 H54 H63 H73 |
| Date: | 2025–07–18 |
| URL: | https://d.repec.org/n?u=RePEc:keo:dpaper:dp2025-016 |
| By: | Wentong Chen; Mr. Fazurin Jamaludin; Florian Misch; Alex Pienkowski; Mengxue Wang; Zeju Zhu |
| Abstract: | This paper studies domestic monetary policy transmission in European countries with a significant share of lending and deposits in foreign currency, referred to as ‘euroized economies’. We find that the impact of domestic monetary policy shocks on both inflation and GDP diminishes with the degree of euroization across countries: the effects are twice as high in non-euroized countries compared to countries in our sample with the highest level of euroization. We further examine the exchange rate, credit and interest rate transmission channels, which are typically less effective in euroized economies. We show that domestic monetary policy has at best limited effects on the exchange rate. In addition, during the post-pandemic monetary tightening episodes, an increase in foreign-currency loans often softened the decline in overall credit growth, and rates of foreign-currency loans have followed the ECB policy rate rather than the domestic ones. By contrast, our analysis suggests that the pass-through to interest rates of domestic currency loans is similar across countries with different levels of euroization. |
| Keywords: | Monetary policy transmission; Euroization; Emerging markets |
| Date: | 2025–09–05 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/177 |
| By: | Fabio Gómez-Rodríguez (Department of Economic Research, Central Bank of Costa Rica); Catalina Sandoval-Alvarado (Department of Economic Research, Central Bank of Costa Rica) |
| Abstract: | This study proposes a structural model to estimate the exchange rate pass-through to prices in Costa Rica, extending the traditional focus on unexpected exchange rate shocks by considering the inflation response to general fluctuations in the nominal exchange rate. It also reviews the main previous estimates for the country, highlighting their contributions and methodological limitations. The analysis yields three key findings: (i) existing approaches tend to underestimate the influence of the nominal exchange rate on prices; (ii) recursive identification schemes such as the Cholesky decomposition impose theoretically questionable assumptions; and (iii) the systematic pass-through exhibits a semi-elasticity of 25 %, significantly higher than the 4 % associated with the unconditional pass-through. Moreover, the study shows that pass-through effects conditional on monetary policy have a substantial impact on inflation, underscoring the importance of explicitly incorporating policy responses in the analysis. ***Resumen: Este estudio propone un modelo estructural para estimar el efecto de traspaso (ET) del tipo de cambio nominal (TCN) a precios en Costa Rica. El modelo permite estimar tres medidas complementarias del efecto traspaso. El ET incondicional representa la respuesta de la inflación a choques inesperados del TCN. El ET condicional recoge el efecto en inflación de choques del TCN inducidos por otros factores. Adicionalmente, se estima el ET sistemático que recoge la respuesta de la inflación ante fluctuaciones generales del TCN. También se revisan las principales estimaciones previas para el país, destacando sus aportes y limitaciones. El análisis ofrece tres conclusiones clave: (i) los enfoques existentes tienden a subestimar la influencia del tipo de cambio en los precios; (ii) la identificación recursiva tipo Cholesky impone supuestos teóricamente cuestionables; y (iii) el traspaso sistemático alcanza una semielasticidad del 25 %, muy superior al 4 % del traspaso incondicional. Además, se demuestra que los efectos de traspaso condicionados a la política monetaria tienen un impacto relevante sobre la inflación, resaltando la necesidad de incorporar explícitamente estas respuestas en el análisis. |
| Keywords: | Inflation; Pass-Through of the Nominal Exchange Rate; Structural VAR, Inflación, Traspaso del tipo de cambio nominal, VAR estructural |
| JEL: | E31 F31 F32 C11 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:apk:doctra:2503 |
| By: | Luca Benzoni; Marisa Wernick |
| Abstract: | We examine the 2025 U.S. debt limit episode through the lens of financial markets. First, we document an increase in trading activity in the U.S. sovereign CDS market, and we infer a probability of default from CDS premiums. We find that default risk reached 1% by the November 6 Presidential election, fell quickly after that, and progressively climbed back up in subsequent months to the current 1.1% level. Overall, these estimates are well below the default risk estimates for the debt-limit episodes of 2011, 2013, and 2023, which range from 4% to 6%. Second, so far we only find small distortions in the market for Treasury bills that mature around the “X-date, ” when Treasury is expected to extinguish its existing resources, and thus would be most affected by a hypothetical default. This is in contrast with the 2023 episode, when bills maturing around the X-date traded with a yield that was about 1% higher than those maturing in other months. Third, we discuss the broader consequences that debt-limit events can have for the level of bank reserves at the Federal Reserve, and their implications for money markets liquidity. |
| Keywords: | U.S. Default; Default probability; CDS; Debt limit |
| JEL: | G10 G12 G18 G28 E32 E43 E44 |
| Date: | 2025–05–27 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedhwp:101720 |
| By: | Koichiro Kamada (Faculty of Business and Commerce, Keio University) |
| Abstract: | This paper reviews the Bank of Japan’s (BOJ) monetary policy from the perspective of surprise observed in the foreign exchange market and investigates the potential of central bank’s surprising announcement as a policy tool to change people’s deflationary mindset. We propose a surprise measure that is based on the daily candlestick-chart data on the yen-dollar exchange rate and identify surprise that occurred in the Tokyo and New York markets. Using the identified surprise, we evaluate monetary policies of BOJ governors and compare them with those of Fed chairs. We present statistical evidence that shows that under the command of Governor Haruhiko Kuroda, the BOJ was strongly dependent on surprise policy in the course of the quantitative and qualitative monetary easing. We also show that the surprise generated during the Kuroda term succeeded in raising the trend inflation rate, but failed to steepen the slope of the Phillips curve and to enhance the pass-through of the foreign exchange rate. |
| Keywords: | deflationary mindset, monetary policy surprise, exchange rate, candlestick chart, trend inflation |
| JEL: | C54 C58 E52 E58 G15 |
| Date: | 2025–07–14 |
| URL: | https://d.repec.org/n?u=RePEc:keo:dpaper:dp2025-015 |
| By: | Petrevski, Goran |
| Abstract: | This paper provides evidence on the effects of sanctions on economic growth for a sample of 107 countries during 1960-2020. The main findings from our empirical investigation are as follows: sanctions have neither contemporaneous nor delayed effects on output growth; in contrast, we find that military conflicts have strong negative impact on growth; differentiating by the senders, we find that both unilateral and multilateral sanctions are non-effective, whereas US sanctions have strong negative effects on growth; as for the effects of various types of sanctions, we provide evidence on the negative impact of trade and financial sanctions, whereas travel and other sanctions do not affect output growth. |
| Keywords: | economic sanctions, output growth, international policy, international conflicts |
| JEL: | F43 F51 F53 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:esprep:325283 |
| By: | Philippe Andrade; Alexander Dietrich; Sophie Handley; John Leer; Raphael Schoenle; Jenny Tang; Egon Zakrajšek |
| Abstract: | A large body of research demonstrates that uncertainty affects many dimensions of firms’ decisions, from investment and hiring to pricing and profitability. To gain a better understanding of how uncertainty induced by shifting trade policy shapes the behavior of small and medium-sized businesses (SMBs) the authors surveyed decision-makers at SMBs. The survey, administered by Morning Consult, was conducted in three waves: in December 2024, February 2025, and late April 2025. Each wave contained a nationally representative sample of about 600 SMBs. |
| Keywords: | business expectations; surveys; tariffs; uncertainty |
| JEL: | F13 F40 D22 D81 C83 |
| Date: | 2025–09–05 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedbcq:101698 |