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on Open Economy Macroeconomics |
| By: | Ulrich Roschitsch; Hannes Twieling |
| Abstract: | This paper shows that regional disparities in house price growth are more pronounced during house price busts than during booms. To explain this observation we construct a two-region currency union model incorporating a housing sector and extrapolative belief updating regarding house prices. To solve the model, we propose a new method that efficiently handles extrapolative belief updating in a wide class of structural models. We show that intensified extrapolation in busts and regional housing market heterogeneities jointly explain elevated regional house price growth dispersion in busts and muted dispersion in booms. Consistent with our theory, we provide empirical evidence that house price belief updating is indeed more pronounced in busts and we document that regional heterogeneities on the housing supply side affect regional house prices. Quantitatively, our model can match empirically observed elevated regional house price growth dispersion in busts. Moreover, we demonstrate that a monetary authority targeting house prices may reduce the volatility of output and prices as well as regional house price growth disparities. This policy is welfare-improving relative to an inflation-targeting benchmark. |
| Keywords: | Housing; Monetary policy; Monetary policy transmission |
| JEL: | E31 E32 E52 F45 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:25-36 |
| By: | Fernando Broner; Alberto Martin; Josefin Meyer; Christoph Trebesch |
| Abstract: | How do shifts in the global balance of power shape the world economy? We propose a theory of alignment-based “hegemonic globalization, ” built on two central premises: countries differ in their preferences over policies (such as the rule of law or regulatory frameworks) and trade between any two countries increases with the degree of alignment in these policies. Hegemons promote policy alignment and thereby facilitate deeper trade integration. A unipolar world, dominated by a single hegemon, tends to support globalization. However, the transition to a multipolar world can trigger fragmentation, which is particularly costly for the declining hegemon and its closest allies. To test the theory, we use international treaties as a proxy for alignment and compile a novel “Global Treaties Database, ” covering 77, 000 agreements signed between 1800 and 2020. Consistent with the theory, we find that hegemons account for a disproportionate share of global treaty activity and that treaty-signing is a leading indicator of increasing bilateral trade. |
| Keywords: | Hegemon, globalization, trade integration, international coercion, international treaties, cooperation, multipolar world |
| JEL: | F02 F15 F50 F51 F55 F60 P45 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:diw:diwwpp:dp2149 |
| By: | Luis Rodrigo Arnabal; Santiago Camara; Cecilia Dassatti |
| Abstract: | This paper studies how shocks to global banks' net worth transmit to Emerging Market Economies. Using the identification strategy of Ottonello and Song (2022), which isolates high-frequency surprises to banks' credit supply capacity, we show that positive shocks appreciate local currencies, lower external borrowing costs, increase capital flows to domestic banking sectors, and raise investment, credit, and real activity across EMEs. These effects are highly robust across specifications and samples. Using administrative credit-registry data from Uruguay, we find that better capitalized banks transmit global credit easing more strongly. At the firm level, responses are weaker for more leveraged firms, especially those with foreign-currency debt, short maturities, or collateral not priced to market. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2512.01132 |
| By: | Tao Liu (Central University of Finance and Economics); Dong Lu (Renmin University of China); Liang Wang (University of Hawaii) |
| Abstract: | There have been two competing views on the structure of the international monetary system: one sees it as a unipolar system with a dominant currency, such as the U.S. dollar, while the other argues that a multipolar system has been the rule, not the exception. We propose a unified theoretical framework to reconcile these two views. In a micro-founded monetary model, we examine the interactions of two essential roles played by international currencies, the medium of exchange and the store of value, and highlight the importance of abundant safe asset supplies. When the two roles reinforce each other, a unipolar equilibrium exists. However, when one currency is unable to serve as sufficient safe assets for international trade transactions, the two roles work against each other, and agents have the incentive to diversify their portfolio, giving rise to a multipolar system. The effects of monetary policy, fiscal policy, and their combinations crucially depend on the total supply of safe assets and the relative importance of the two functions of international currencies. The structure of the international monetary system could be influenced by various policies such as monetary policy, fiscal policy, and financial sanctions. A calibrated model shows that, all else equal, USD could lose its dominance if the US fiscal capacity deteriorates by 34\% or the US economy size shrinks by 32%. |
| Keywords: | International Currency, Money, Multipolar, Safe Assets, Unipolar |
| JEL: | E42 E52 F33 F40 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:hai:wpaper:202504 |
| By: | Martin Ertl; Adrian Wende |
| Abstract: | Abstract:This policy brief examines the extent to which Austrian exports are exposed to exchange rate risk and how exchange rate fluctuations affect exports to countries outside the euro area. As exchange rates are largely disconnected from macroeconomic fundamentals, they are likely driven to some extent by financial shocks, resulting in significant volatility and exchange rate risk. Nevertheless, Austria’s overall exposure to such risk is relatively limited. Most exports go to countries with comparatively stable currencies, while highly volatile currencies account for only a small share of both total exports and exporting firms. Survey evidence indicates that many Austrian exporters manage exchange rate risk by invoicing in euros, which substantially reduces short-term risk, especially for small and medium-sized firms. In addition, a considerable number of firms use trade insurance. Empirical studies show that Austrian exports react only moderately to exchange rate movements, although the degree of sensitivity varies significantly across sectors and products. |
| Keywords: | International Competitiveness, Austria, export performance, Currency volatility, Euro invoicing, Exchange rate risk |
| JEL: | F31 F14 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:wsr:pbrief:y:2025:m:12:i:71 |
| By: | Anahit Matinyan (Central Bank of Armenia) |
| Abstract: | This paper examines exchange rate pass-through (ERPT) to inflation in Armenia using monthly data from 2008-2023. Combining reduced-form estimation with a structural vector autoregression (SVAR) model, it provides evidence on both average and shock-specific ERPT. The analysis yields three key findings. First, exchange rate fluctuations affect domestic prices primarily through the U.S. dollar exchange rate, confirming the relevance of the dominant currency paradigm. Second, ERPT is highly heterogeneous across consumer price index (CPI) components, with larger effects for tradable and imported goods and limited responses for non-tradables and services. Notably, imported prices display a short-run asymmetry, with depreciations eliciting stronger responses than appreciations of comparable size. Third, ERPT is shock-dependent: monetary policy shocks generate the strongest and most persistent pass-through, underscoring the importance of the exchange rate channel in Armenia's monetary transmission mechanism. The results remain consistent across methods, reinforcing their robustness and offering policy-relevant insights for small, dollarized economies pursuing inflation targeting under external volatility. |
| Keywords: | Inflation, Price Level, Monetary Policy, Exchange Rate Pass-Through |
| JEL: | E31 E52 F31 F41 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:ara:wpaper:wp-2025-05 |
| By: | Pablo Aguilar-Perez |
| Abstract: | This paper examines the global spillovers of US monetary policy through the remittance channel, in both sending and recipient countries. Using a dataset covering 8 remittance-sending and 41 recipient countries from January 1997 to December 2017, we apply a local projections framework to trace the dynamic effects of unexpected US monetary tightening. We find that remittance outflows decline in advanced economies following policy shocks, illustrating the pro-cyclicality of remittances in source countries and their role in amplifying global financial spillovers. Among recipient countries, our results show that in countries with low to moderate remittance dependence, inflows tend to increase following a contractionary shock – consistent with altruistic or insurance-driven motives. In contrast, remittances decline in highly dependent countries, aligning with self-interest or investment-driven behavior. We find that these heterogeneous responses are shaped by migrant profiles: countries with high remittance dependence typically have a larger share of low-skilled migrants and display more strongly pro-cyclical remittance patterns. In contrast, less dependent countries tend to have more skilled or diversified diasporas, resulting in more stable and less cyclical remittance flows. |
| Keywords: | Global Spillovers;Remittances;US Monetary Policy;Emerging Markets |
| JEL: | F24 E52 F41 F44 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:cii:cepidt:2025-21 |
| By: | Martin Bernstein; Josefin Meyer; Kevin O’Rourke; Moritz Schularick |
| Abstract: | Do trade dependencies leave countries vulnerable to geopolitical coercion? We study the economic costs of trade and financial sanctions, from 1920 to the present. We first develop a continuous measure of sanction intensity, using bilateral commodity-level data to calculate the importance of specific flows that fall under sanctions. We find that sanctions inflict relatively small costs on average: sanctioning 1% of GDP worth of imports or exports leads to approximately 0.3 percentage points of lost GDP over a 5-year period and a 0.1 percentage point increase in unemployment. However, we show that sanctions are far more costly for countries whose trade is highly concentrated, and for countries that rely heavily on exporting primary commodities. Low income and developing countries appear most vulnerable to trade sanctions, while high income financial centers and some EU countries are among the most exposed to financial sanctions. |
| Keywords: | Trade sanctions, trade dependencies, financial sanctions, effects of sanctions |
| JEL: | F13 F14 F41 F51 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:diw:diwwpp:dp2148 |
| By: | Duarte, João B.; Pires, Mariana N. |
| Abstract: | We study how financial integration shapes the transmission of monetary policy to consumer prices and output in the euro area. Using local projections, we document that the effect of financial integration is continuous: greater integration systematically strengthens the pass-through of monetary policy. When integration falls to low levels—around the first quartile of its historical distribution— transmission to both prices and output becomes statistically and economically insignificant. The amplification pattern is pervasive across member states and more pronounced in peripheral economies. These results show that financial integration is a key determinant of monetary policy effectiveness within the euro area. JEL Classification: E44, E52, F36, F45 |
| Keywords: | financial integration, local projections, monetary policy, monetary union |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253165 |
| By: | Ziran Ding; Adam Hal Spencer; Zinan Wang |
| Abstract: | Amid ongoing geoeconomic tensions, industrial policy has emerged as a prominent tool for policymakers. What are the dynamic and welfare effects of these policies? How does the short-sightedness of policymakers influence their choice of instruments? What are the distributional consequences of these protectionist measures? We address these questions with a dynamic two-country general equilibrium framework that incorporates ï¬ rm heterogeneity, trade, and the offshoring of tasks. By calibrating the model to the contexts of the US and China, we explore the effects of three popular industrial policies: import tariffs, domestic production subsidies, and entry subsidies. Our findings indicate that, from an initial state free of interventions, myopic policymakers are incentivized to subsidize production, while more forward-looking ones favor imposing import tariffs. Although all of these policies initially reduce wage inequality, some result in aggregate welfare losses, either in the short run or the long run. |
| Keywords: | macroeconomic dynamics, firm heterogeneity, trade, trade-in-tasks, industrial policies, welfare, global value chains |
| JEL: | F23 F41 F51 F62 L51 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-67 |
| By: | Luetticke, Ralph; Meyer, Timothy Andreas; Müller, Gernot J.; Schularick, Moritz |
| Abstract: | Using historical income and wealth data, we show that war reduces inequality: the top-1% income share falls by 20% and the top-1% wealth share by 10%. We measure three key drivers of inequality - capital destruction, taxation, and inflation - in the data and quantify their role with a Heterogeneous Agent New Keynesian (HANK) model. Destruction depresses profits and thus top incomes. Taxation primarily influences wealth dynamics, while inflation has little effect on top shares, but reduces indebtedness among poorer households. We validate our findings using new data on inequality across German towns in World War 2 and cross-country data on profits. |
| Keywords: | Interstate Wars, Inequality, Income share, Wealth share, Distribution, Capital destruction, Inflation, Taxes, HANK |
| JEL: | F40 F50 E50 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ifwkwp:333888 |