|
on Open Economy Macroeconomics |
| By: | Sebastian Horn; Carmen M. Reinhart; Christoph Trebesch |
| Abstract: | States are major international financiers, but their role is poorly understood. We study state-driven cross-border lending over two centuries using a new database covering 1.2 million official loans and grants by 134 governments and 70 multilateral institutions since 1790. We document a dual, state-contingent structure of international credit. In normal times, private creditors dominate cross-border lending. In adverse states of the world, such as wars and financial crises, official creditors step in, at times on a massive scale. These official flows are driven by great powers, are highly subsidized, and are largely absent from canonical models in international macroeconomics. |
| JEL: | E42 F33 F34 F35 F36 G01 G20 N01 N2 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35225 |
| By: | Joshua Aizenman; Hiro Ito; Jamel Saadaoui |
| Abstract: | This paper asks why openness has been such a strong catalyst for catch-up growth in some regions or countries, while in others openness has been followed by stalled convergence, divergence, or stagnation. We conclude that “openness” in today’s geoeconomically fragmented world is much more than trade intensity or trade integration. Positioning in trade networks, trade fundamentals, human capital, institutional capacity and stability matters for the potential for trade-induced productivity gains. We explore the global heterogeneity across continents between 1960 and 2024, unbalanced panel of up to 145 economies per year and estimate a growth equation using a dynamic approach for countries and years. We build a baseline equation relating real GDP growth to lagged income and growth. We complement the traditional drivers of growth by contorting for positionings variables the world economy: a proxy for economic integration measuring the number of regional trade arrangements ratified by each economy, a commodity dependence indicator; metrics related to export networks geoeconomic vulnerability (GeoV). measure country’s export position with geopolitically distant partnerships; geoeconomic connectivity (GeoC) measuring the degree that trade relationships are across greater spectrum of geopolitics. The GeoC measures external “connectors” positioning that may counterbalance costs of geoeconomic fragmentation by securing access to greeter variety of markets and resources. Notably, the Geoeconomic linkages add an important element of “positioning, ” indicating that the more “geopolitically” connected is a country, the greater are the investment-growth links. A greater diverse positioning of countries’ economies improves their capacity to transform investment into output in a more diversified setting. This also indicate a lesser dependent growth on “momentum” by countries’ economy, pointing to a greater shock-absorption capacity, confirming the benefits of diversified structure for growth from investments facing pressures from fragmentation. |
| JEL: | F42 F50 F52 F63 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35242 |
| By: | Kris James Mitchener; Mathieu Pedemonte |
| Abstract: | Using newly digitized monthly data on the quantities and prices of imports as well as product-level data on tariff rates, we estimate that in the first year after the passage of the Smoot-Hawley Tariff Act, imports facing rate increases fell swiftly and dramatically relative to imports not affected by tariffs: for a one-percentage-point increase in the tariff rate, they declined by an average of 4%. We also estimate that the incidence of Smoot-Hawley was almost entirely borne by U.S. importers. Using an open-economy model, we attribute our high measured short-run trade elasticity of greater than 4 to fixed exchange rates that the U.S. maintained with most trade partners in the first 15 months after enactment. Our model also suggests that Smoot-Hawley accounted for 27% of the decline in total US imports in the first year after enactment. Finally, we construct both partial equilibrium and general equilibrium welfare estimates of Smoot-Hawley. Both methods deliver welfare losses of about 0.2% of GDP, reflecting the high measured elasticity of substitution and low US import-GDP ratio. |
| JEL: | F10 F13 F14 F63 F68 N12 N72 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35249 |
| By: | Cochrane, John H.; Garicano, Luis; Masuch, Klaus |
| Abstract: | In the last two decades, the euro area was hit by multiple crises. Fiscal and monetary emergency actions broke important constraints and expectations set by the euro’s founding principles. Several euro countries broke fiscal rules. As politicians expect European Central Bank (ECB) support for public debt in any crisis, they have weak incentives to build fiscal buffers, or to undertake needed fiscal reforms. Consequently, fiscal spaces for additional borrowing are dangerously narrow. Banks also expect ECB support, and bank regulators still treat sovereign debt as risk free. Consequently, banks hold large quantities of sovereign debt. Sovereign restructuring then imperils the financial system. Reforms are necessary to strengthen the euro, and with it the benefits the euro provides to euro area citizens. Euro countries must face market discipline to give incentives for responsible fiscal policy and economic efficiency. In the end, euro countries must be able to default, i.e. restructure their debt, in an orderly manner without this creating a major financial disaster. This possibility requires a banking regulation reform that avoids the current incentives for banks to accumulate large exposures to public debt, in particular of their own domestic sovereign. The euro area needs a well-constructed European Fiscal Institution (EFI) for the management of fiscal troubles and balance of payment problems of euro countries. The EFI needs all necessary powers, tools, the ability to make swift decisions, and sufficient capital financed by member states, to fully unburden the ECB. The ECB should reduce its footprint to protect its independence, its balance sheet, and thereby its ability to fight inflation even in times of fiscal trouble. The ECB must stop quashing true market signals that give incentives for sound fiscal policies and prudent risk management of banks. The ECB should stay away from quasi-fiscal interventions, such as balance sheet policies that favor fiscally fragile countries and their bondholders and create fiscal transfers between countries and from taxpayers to banks. |
| Keywords: | monetary policy; fiscal policy; monetary union; ECB; sovereign default |
| JEL: | E42 E52 E58 E62 |
| Date: | 2026–05–22 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:138669 |
| By: | Konstantin Kucheryavyy (CUNY Baruch College); Alexander Monge-Naranjo (FRB Atlanta, Emory University, and CEPR); Kenichi Ueda (The University of Tokyo, CEPR and TCER) |
| Abstract: | Major industrialization episodes—from nineteenth-century Britain to Germany, the United States, Japan, Korea, and China—were followed by persistent current account surpluses and large accumulations of external wealth, a pattern at odds with standard current-account models. We develop a model of the transition dynamics of an emerging economy that explains this behavior. Two financial frictions are central: a gold-in-advance constraint requiring hard-currency settlement of debt service and consumption imports, and a pledgeability constraint linking foreign borrowing to capital-goods imports. These frictions generate an endogenous transition from net debtor to persistent net creditor during industrialization. Doing so, the framework resolves the Lucas Paradox and reproduces the falling-then-rising external-wealth dynamics observed across industrialization episodes since 1845, which are key for understanding the observed global imbalances. |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:cfi:fseres:cf628 |
| By: | Barthélémy Bonadio; Andrei A. Levchenko; Nitya Pandalai-Nayar |
| Abstract: | This paper quantitatively evaluates other countries' optimal tariffs and the prospects of sustaining international trade cooperation when a large player—the United States—exits the cooperative trade regime. To guide the analysis, we rely on an analytical characterization of the optimal tariff in a simplified multi-country trade model with endogenous labor supply. A country's optimal import tariffs are a function of its trade partners' expenditure shares on its goods, and the trade and labor supply elasticities. In both the simplified model and the full quantitative multi-country, multi-sector global network model, the impact of the US withdrawal from free trade on other countries' optimal tariffs and the sustainability of the cooperative trade regime is minimal. This is because quantitatively, the key determinants of these objects—domestic and international trade shares of other countries—change little from the US withdrawal. This main finding is not sensitive to the trade or labor supply elasticities. Thus, the fall of the US free trade domino is unlikely to cause further dominoes to fall. |
| JEL: | F02 F13 F55 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35303 |
| By: | Daniel Marcel te Kaat; Alexander Raabe |
| Abstract: | How do international investors adjust portfolios in response to biodiversity risk? Using monthly data on investment fund portfolios, we show that the 2021 Kunming Declaration led fund managers to reallocate portfolios from high-biodiversity risk countries to less risky ones, while ultimate fund investors remained unresponsive. Fund managers reduced exposures to extremely high biodiversity risk without seizing low biodiversity risk as an opportunity for profit, characterizing biodiversity as downside risk factor. Investment funds drive cross-country spillovers as the reallocation triggers significant capital flows beneï¬ ting countries in the same geographic region, but outside of a fund's hitherto established portfolio. Using a novel measure of legal action to protect nature, we demonstrate that countries adopting more legal acts are partially shielded from funds reducing their exposure to high-biodiversity risk countries. |
| Keywords: | biodiversity, risk, portfolio reallocation, cross-border capital flows, spillovers, investment fund, Kunming Declaration |
| JEL: | F3 G1 G2 Q5 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-41 |
| By: | Iwata, Yasuharu |
| Abstract: | Despite large-scale fiscal stimulus amid constrained monetary policy, Japan did not emerge from its prolonged deflationary period until sharp yen depreciation took hold. Using firm-level data, this paper examines the role of public signals in firms' expectation formation and decisions, with a focus on fiscal stimulus announcements and exchange rate dynamics. We find that growth and inflation expectations underreact to fiscal signals, resulting in only a negligible effect on investment and pricing decisions. Yen movements are driven primarily by time-varying risk premia, and depreciation expectations play no independent role in firm decisions. Firms respond mainly to realized exchange rate outcomes and expected cost conditions, consistent with Japan's recent cost-push-driven emergence from deflation. |
| Keywords: | Survey data; Expectation formation; Fiscal policy; Zero lower bound; Uncovered interest parity; Safe-haven currency |
| JEL: | D84 E62 F31 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:129006 |
| By: | Sangyup Choi (Yonsei University); Hyunpyung Kim (University of Texas at Austin) |
| Abstract: | This paper estimates Korea's long-run real neutral interest rate and quantifies the structural forces behind its decline since 1990. Using semiannual data for 12 advanced economies over 1990-2024, we estimate a cross-country panel state-space model that separates country-specific productivity and demographic trends from common global components. Korea's neutral rate falls from about 1.6% in 1990 to roughly 0.7% in 2024. The model attributes this decline mainly to slower trend productivity growth, the post-2014 reversal in the working-age population share, and spillovers from major advanced economies. Safe-asset market forces also contribute, but supply and demand effects partly offset each other. Counterfactual simulations suggest that removing global spillovers would raise the 2024 estimate by about 0.6 percentage points, while holding the working-age share at its 2014 level would raise it by about 0.5 percentage points. Conditional demographic scenarios imply continued downward pressure absent offsetting structural changes, highlighting implications for monetary policy space. |
| Keywords: | Neutral interest rate; Demographic changes; Korean economy; Global spillovers; State space model |
| JEL: | E43 E47 E58 F15 F62 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:yon:wpaper:2026rwp-292 |
| By: | Markkanen, Jaakko; Siikanen, Markku; Valmari, Nelli |
| Abstract: | Abstract A country that cannot devalue its currency can still cut its exporters’ costs through industrial policy and steal business from foreign rivals. We call this beggar-thy-neighbor by other means and measure it for Finland’s 2017–2019 internal devaluation policy. We estimate the export demand for nine large manufacturing industries, together accounting for roughly 4 percent of Finnish GDP, using a BLP-style demand model and a sufficient-statistic identity for cost incidence. We document super-pass-through to export prices, averaging about 1.18, above the CES gravity ceiling. The realized policy cut labor costs by 3.6 percent and raised Finnish export revenue by €239.0 million over 2017–2020, 0.6 percent of baseline. A more ambitious original government proposal with 5 percent cost decrease would have shifted €567.8 million in revenue away from rival exporters in the same destinations. A hypothetical four-day work week would have cost €2.4 billion with wage costs rising 28 percent. Internal devaluation captures export-market share from foreign rivals. The cross-border revenue transfer is comparable in magnitude to the domestic gains. |
| Keywords: | International trade, Markups, Pass-through, Industrial policy, Internal devaluation |
| JEL: | F12 F14 L11 L13 L52 |
| Date: | 2026–06–15 |
| URL: | https://d.repec.org/n?u=RePEc:rif:wpaper:141 |
| By: | Wabenga, James Yango; Moran, Kevin |
| Abstract: | This paper develops a two-country, open-economy quantitative model to analyze the macroeconomic implications of demographic shifts, including population aging, declining population growth rates, increased longevity, and international migration. The model builds on the overlapping generations (OLG) framework of Gertler (1999), incorporating both young and old households in each country. Entry (population growth), retirement, and exit (death) rates are calibrated to match observed demographic patterns, such as population growth rates, average retirement ages, and life expectancy. The model accommodates various demographic scenarios-such as differential population growth across countries and migration from developing to developed economies-as well as economic scenarios, including divergent productivity levels and imperfect global financial integration. As such, it provides a valuable quantitative tool for policy analysis on these issues. The model’s capabilities are demonstrated through simulations of key demographic and economic scenarios, focusing primarily on how population aging, international migration, and productivity differences affect external balances (net exports and the current account) in two regions, seen as the global North and the global South. The findings highlight the importance of demographic trends as a main factor influencing overall savings and external balances. Specifically, demographic shocks lead to trade and current account surpluses in the North, while productivity differences shape investment patterns across regions. The results indicate that, over time, an aging economy like the global North is likely to run a trade deficit, save more, have a favorable net external position, and maintain a current account surplus. |
| Keywords: | Open economy macroeconomics; Current account balance; Trade balance; International migration; Financial markets; Demographic trends |
| JEL: | E21 E44 E62 F22 F32 F41 J11 |
| Date: | 2024–10–03 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:129082 |
| By: | Brezis, Elise |
| Abstract: | The historical record of the past 350 years reveals recurrent cycles in the international distribution of power: periods of hegemonic leadership, in which a dominant state shapes the international order, alternate with periods of balance-of-power rivalry, when no single state is preeminent and major powers compete on more equal terms. Trade policy also follows a cyclical pattern, with phases of liberalization giving way to periods of protectionism. This paper examines the relationship between these two cycles, and analyzes how the international power structure changes the optimal trade regime.. It argues that hegemonic periods, such as 1870–1910 and 1945–2015, are more conducive to free trade, because the hegemon provides security guarantees, access to markets, and institutional linkages that reduce the risks of liberalization and increase the benefits of openness. By contrast, during balance-of-power periods, such as 1910–1945 and the period since 2015, intensified rivalry among great powers strengthens nationalism, heightens concerns over sovereignty, and encourages protectionist policies. The paper proposes an explanation for this correlation grounded in theories of national identity and sovereignty. More broadly, it shows that shifts in the structure of the international system affect not only interstate relations but also domestic policy choices. The empirical analysis supports this argument: hegemonic eras are associated with waves of trade liberalization, whereas balance-of-power eras are linked to higher tariffs and a stronger turn toward protectionism. |
| Keywords: | Balance of Power, Geopolitics, Hegemony, National Sovereignty, Trade Policy, Free Trade, Protectionism, Social Identity. |
| JEL: | F40 F42 F52 N4 Z13 |
| Date: | 2026–04–28 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128967 |
| By: | Nadia Pozdnyakova (New Economic School) |
| Abstract: | The paper explores the role expectations play in the economy’s response to exchange rate fluctuations. Using data fr om the Central Reserve Bank of Peru, I analyze firm-level exchange rate forecasts and find that firms deviate from rational expectations by over reacting to new information and overestimating the persistence of the current exchange rate. I also demonstrate that firms that anticipate depreciation are more likely to reduce employment and production. Based on these observations, I develop the behavioral general equilibrium model of a small open economy wh ere the exchange rate is driven by a financial shock to the uncovered interest parity condition. Firms set their prices infrequently and associate expected depreciation with a higher future path of marginal costs. They overestimate the persistence of the shock and contract their economic activity more than under the rational expectations benchmark, potentially reversing the sign of the aggregate output response. If households and financial institutions share this bias, the impact of the shock becomes amplified, contributing to greater exchange rate volatility |
| Keywords: | Exchange rate, survey expectations, overreaction, exchange rate disconnect, UIP shock |
| JEL: | F41 E71 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:abo:neswpt:w0294 |
| By: | Bhattarai, Keshav; Adhikari, Ambika P. (Institute for Integrated Development Studies (IIDS)) |
| Abstract: | The United States dollar’s dominance as the global reserve currency, established under the 1944 Bretton Woods system, has persisted despite the 1971 decoupling of the dollar from gold. Its liquidity, stability, and backing by the U.S. government provide strong financial security and advantages, including widespread global acceptance and relatively low borrowing costs. For these reasons, the U.S. dollar has dominated global markets for the past eight decades. However, rapidly emerging geopolitical and economic power shifts are increasingly challenging the dominance of the U.S. dollar. In 2009, Brazil, Russia, India, China, and South Africa formed BRICS as a platform for collaboration and investment cooperation. BRICS, which has since expanded to include ten countries, is exploring alternatives to the U.S. dollar for international trade. These alternatives include trade in local currencies and the use of Central Bank Digital Currencies (CBDCs). Western sanctions on China, Russia, Iran, and other countries, as well as China’s ambitious Belt and Road Initiative, have further accelerated efforts to reduce dependence on the dollar-based system. These emerging trends have mixed implications for South Asia. India is actively promoting rupee-based trade to strengthen regional commerce using the Indian Rupee, and several South Asian countries aspire to pursue similar approaches. The limited convertibility of the currencies of BRICS member nations makes a complete replacement of the U.S. dollar in international trade difficult. Nepal, in particular, may face substantial challenges because its economy relies heavily on remittances and imports, both of which remain closely tied to the global dollar-based financial system. |
| Date: | 2025–02–15 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:s75q4_v1 |
| By: | Wabenga, James Yango; Moran, Kevin |
| Abstract: | This paper presents an empirical analysis of the impacts of global demographic changes and international migration on external balances. It categorizes countries into advanced, emerging, and developing economies and conducts the analysis region by region. The results are obtained from panel models that estimate the impact of demographic trends on macroeconomic aggregates. This analysis is conducted region by region, examining one demographic factor (such as aging, fertility, life expectancy, or immigration) and one macroeconomic aggregate (consumption, savings, investment, trade balance, or current account balance) at a time. The results notably report that larger proportions of older adults have a detrimental effect on the trade balance in advanced and merging economies. Additionally, aging in emerging and developing economies is associated with lower savings rates and current account balance to GDP ratio, while in advanced economies, savings rates tend to rise with life expectancy, aging, and net migration. The results suggest that the trade balance is positively associated with the change in the working-age population share in advanced economies, while it is mostly negatively associated with the trade balance in emerging economies. Changes in life expectancy have a negative impact on the trade balance in both advanced and emerging economies. Finally, net immigration increases saving rates in advanced economies and investment in emerging and developing economies. This paper highlights the importance of regional conditioning when examining how demographic trends affect economic decisions, consumption, investment, labour markets, external balances, and public policy. Regional analyses of the effects of demographic changes on the macroeconomy are essential. Although all regions face demographic changes, their scale varies. Therefore, this paper examines the impact of demographic factors on the macroeconomic performance of each region. |
| Keywords: | Demographic trends; International migration; Consumption; Savings; Investment; Trade balance; Current account. |
| JEL: | E21 E22 F16 F22 F32 F41 J11 J21 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:129084 |
| By: | Muya, Jonathan |
| Abstract: | This paper provides a comprehensive analysis of current account sustainability in the Democratic Republic of Congo (DRC), focusing on the structural determinants of persistent external imbalances and the policy mechanisms required for sustainable adjustment. Drawing on both theoretical and empirical frameworks, the study demonstrates that the DRC’s current account deficit is predominantly structural, rooted in weak economic diversification, chronic service deficits, and significant primary income outflows linked to foreign-owned extractive industries. Using a mixed methodological approach, including descriptive analysis and econometric modeling, the findings reveal that external imbalances are closely tied to domestic structural constraints and limited absorptive capacity. The paper argues that sustainable adjustment requires not only macroeconomic stabilization but also deep structural transformation, including industrial diversification, financial development, and improved allocation of foreign direct investment (FDI). The study contributes to the broader literature on current account sustainability in resource-dependent economies and offers policy recommendations tailored to the Congolese context. |
| Keywords: | Current Account Sustainability; External Imbalances; Structural Deficit; Economic Diversification; Absorptive Capacity; Foreign Direct Investment (FDI); Resource-Dependent Economies; Balance of Payments Adjustment; Financial Development; Democratic Republic of Congo |
| JEL: | F33 F41 F43 O11 O16 O55 Q33 |
| Date: | 2026–05–08 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:129368 |
| By: | Nargelle Adnaoui (Université Hassan II de Casablanca, Faculté des Sciences Juridiques, Économiques et Sociales – Aïn Chock); Hicham Mesk |
| Abstract: | This paper examines the implications of Morocco's transition toward a more flexible exchange rate regime for the competitiveness of small and medium-sized enterprises (SMEs), within a context of gradual economic openness. The analysis draws on core exchange rate theories, contemporary approaches to firm competitiveness, and the structural specificities of Moroccan SMEs. The study shows that fluctuations in the dirham directly affect firms' costs, profit margins, and strategic decisions. These effects are heterogeneous and depend on SMEs' profiles and their degree of exposure to international markets. Firms endowed with strong internal resources, well-developed organizational capabilities, and greater strategic flexibility display a higher capacity to adapt to exchange rate volatility, whereas less structured SMEs appear more vulnerable to monetary shocks. The findings also highlight the critical role of the institutional environment. Administrative burdens, limited access to financing, and payment delays may amplify SMEs' vulnerability and moderate the potential benefits of increased exchange rate flexibility. This research adopts a conceptual approach based on an integrative literature review. It proposes a structured theoretical framework linking exchange rate flexibility, internal resources, adaptive strategies, and institutional factors. The analysis suggests that exchange rate flexibility represents both a source of risk and a potential lever of competitiveness for Moroccan SMEs. |
| Abstract: | Cet article examine les implications de la transition vers un régime de change plus flexible au Maroc sur la compétitivité des petites et moyennes entreprises (PME), dans un contexte d'ouverture économique progressive. L'analyse mobilise les principales théories des taux de change, les approches contemporaines de la compétitivité ainsi que les spécificités structurelles des PME marocaines. L'étude met en évidence que les fluctuations du dirham influencent directement les coûts, les marges et les choix stratégiques des entreprises. Les effets apparaissent différenciés selon le profil des PME et leur degré d'exposition aux marchés internationaux. Les entreprises disposant de ressources internes solides, de capacités organisationnelles développées et d'une flexibilité stratégique accrue présentent une meilleure capacité d'adaptation face à la volatilité du taux de change, tandis que les PME moins structurées apparaissent plus vulnérables aux chocs monétaires. Les résultats soulignent également le rôle déterminant de l'environnement institutionnel. Les contraintes administratives, les difficultés d'accès au financement et les délais de paiement peuvent amplifier la vulnérabilité des PME et moduler les effets d'une flexibilité accrue du taux de change. Cette recherche adopte une approche conceptuelle fondée sur une revue intégrative de la littérature. Elle propose un cadre théorique structuré reliant la flexibilité du taux de change, les ressources internes, les stratégies d'adaptation et les facteurs institutionnels. L'analyse met en évidence que la flexibilité du dirham constitue simultanément un facteur de risque et un levier potentiel de compétitivité pour les PME marocaines. |
| Keywords: | Institutional quality, Organizational resilience, Moroccan SMEs, SME competitiveness, Qualité institutionnelle, Résilience organisationnelle, PME marocaines, Compétitivité des PME, Flexibilité du taux de change |
| Date: | 2026–02–22 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05524530 |