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on Open Economy Macroeconomics |
| By: | Ashima Goyal (Indira Gandhi Institute of Development Research); Sritama Ray (Indira Gandhi Institute of Development Research) |
| Abstract: | Reducing borrowing costs for emerging markets (EMs) is a challenge. The additional country risk premia that foreign investors seek are primarily driven by a fear of unexpected currency depreciation; which often does not take place. It follows there are positive excess returns from EM assets. We find while the interest rate differential (IRD) is near-zero for advanced economies, it is always positive for EMs. Excess exchange rate volatility is often due to global and not domestic factors, so that a pure float aggravates instead of mitigating shocks. Lower exchange rate volatility, risk and risk-perceptions can reduce EM IRDs. A suitable exchange rate regime and domestic as well as international prudential regulation on cross-border capital flows can lower volatility. Different phases of India's flexible float illustrate these issues well. |
| Keywords: | Exchange rate volatility, emerging markets, advanced economies, interest rate differentials, excess returns, global shocks, policies |
| JEL: | F31 F41 E65 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:ind:igiwpp:2025-026 |
| By: | Emrehan Aktuğ; Abolfazl Rezghi |
| Abstract: | We study optimal monetary and exchange rate policy in a small open economy facing oil price shocks. In a model with segmented financial markets that generate endogenous UIP deviations, the first-best allocation is achieved through a combination of interest rate policy and foreign exchange intervention (FXI). Monetary policy stabilizes domestic inflation and the output gap, while FXI targets the UIP wedge to offset financial frictions. Oil price shocks endogenously move the net foreign asset position, giving rise to financial imbalances that make FXI essential—a mechanism distinct from exogenous financial shocks highlighted in the literature. Quantitatively, for a calibrated oil exporter, suboptimal regimes such as a free float or a simple peg entail sizable welfare losses of around 2% in consumption-equivalent terms, though peg, and especially peg with fuel subsidies, can outperform free floats. Overall, FXI is crucial to break the destabilizing link between real commodity shocks and financial risk premia. |
| Date: | 2026–02–20 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/030 |
| By: | Ballensiefen, Benedikt; Somogyi, Fabricius; Winterberg, Hannah |
| Abstract: | We study the determinants of US dollar demand across market participants and traded instruments using survey-based exchange rate and macroeconomic expectations. Leveraging granular FX trading data and forward looking expectations, we present three results. First, currency investors increase their dollar holdings when expecting US dollar appreciation or improved US macroeconomic fundamentals, whereas synthetic dollar funding is driven by forecasted CIP deviations. Second, cross-sectionally, investors rebalance along the factor structure of currency risk into dollars following an expected dollar appreciation. Third, responses to professional forecasts weaken when uncertainty or forecaster disagreement rises, and are lower for forecasters with poorer past accuracy. Our findings demonstrate that long-horizon expectations accurately predict dollar demand across spot, swap, and forward currency markets. We rationalize those finding in a theoretical model of currency demand. |
| Keywords: | Exchange rate expectations, dollar demand, currency flows, FX swaps, survey forecasts |
| JEL: | F31 G15 F37 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:cfrwps:337468 |
| By: | Tobias Krahnke; Wenjie Li |
| Abstract: | Capital flow restrictions have long been debated as a tool to manage external financial vulnerabilities, as volatile international capital flows and high external debt can contribute to financial crises. However, empirical evidence on whether capital flow management measures (CFMs) can shift the composition of countries’ external liabilities toward more stable types of funding is limited. Using a novel dataset of granular capital account openness indicators measuring policy intensity, we show that an asymmetric liberalization favoring equity over debt can tilt external capital structures toward equity. This effect is stronger in countries with higher institutional quality, underscoring the role of governance in attracting stable foreign investment. |
| Keywords: | Capital Controls; Foreign Direct Investment; Portfolio Equity; External Debt; External Liabilities |
| Date: | 2026–02–27 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/037 |
| By: | Linda S. Goldberg; Oliver Hannaoui |
| Abstract: | The share of US dollar assets in the official foreign exchange reserve portfolios of central banks, at times, is taken as an indicator of the dollar's global status. We provide a decomposition that shows two distinct channels contributing to the changes in the dollar share of reserves aggregated across countries: shifts in preferences for dollar assets, and changes in reserve balances driven by countries whose portfolio allocations differ from the aggregate. We document how the concentrated nature of foreign exchange reserve holdings allows countries that contribute a large share of aggregated reserves to exert substantial influence on aggregate dollar shares over time, potentially dominating the narrative. In recent periods, the key contributors to changes in aggregate preference shifts for dollar assets are changes in bilateral country trade with the United States and dollar debt share, with geopolitics additionally working through the investment tranches of central bank portfolios. Diversification away from dollar assets is more prevalent conditional on official reserves of countries being large enough to satisfy country liquidity needs. |
| JEL: | F33 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34888 |
| By: | Juan Pablo Di Iorio (Universidad de San Andrés); Javier García-Cicco (Universidad de San Andrés) |
| Abstract: | A salient feature of many emerging and developing economies is that a substantial fraction of government debt is denominated in foreign currency. We study the implications of the Fiscal Theory of the Price Level (FTPL) in a standard New Keynesian small and open economy model, with an explicit role for the currency denomination of public debt. We show that, while the classical FTPL characterization of equilibrium existence and uniqueness extends largely independently of debt composition, the propagation of shocks does not. The currency denomination of public liabilities alters the effects of monetary and fiscal policy, including the possibility that a monetary tightening leads to a depreciation under active fiscal regimes. More broadly, the interaction between the fiscal-monetary policy mix and the share of foreign-currency debt also plays a central role in shaping the response to external shocks. |
| Keywords: | E31; E52; E63; F41 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:sad:wpaper:179 |
| By: | Balázs Zélity (Department of Economics, Wesleyan University) |
| Abstract: | This paper empirically investigates whether shifts in demographic structure have an im-pact on cross-border capital flows. Country-level panel data with global coverage is utilised in fixed effects regressions. Demographic variables are instrumented by their predicted values, which are calculated using a shift-share methodology. Local projections estimates complement the results with a dynamic perspective. The main finding is that there is a persistent positive relationship between a country’s old-age dependency ratio and its current and financial account balance – suggesting that population ageing increases net capital outflows. From the perspective of the current account, the mechanism is increased national saving, primarily by households, and exports. From the perspective of the financial account, the increased net outflows are happening primarily through a direct investment channel. |
| Keywords: | population ageing, FDI, saving, current account |
| JEL: | F21 J11 F30 F23 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:wes:weswpa:2026-005 |
| By: | Tamim Bayoumi ((King’s College); Joseph E. Gagnon (Peterson Institute for International Economics) |
| Abstract: | Global current account imbalances widened in the past two years, led by growing surpluses in China and deficits in the United States. Most forecasters expect imbalances to stabilize or even narrow in 2026 and 2027. Bayoumi and Gagnon disagree with these projections, concluding that China's surplus will grow considerably, putting downward pressure on surpluses in Europe and the rest of Asia. The global economy may be on the cusp of a second, more intense China shock, with profound geopolitical and economic consequences. |
| Keywords: | Current account; protectionism; tariff; trade tensions. |
| JEL: | F21 F32 F34 F51 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:iie:wpaper:wp26-2 |
| By: | Anna Cole; Christopher J. Neely |
| Abstract: | One of the U.S. dollar’s influential international roles is as the dominant reserve currency, widely used in international foreign exchange reserves, which are rainy day funds for governments. |
| Date: | 2026–02–25 |
| URL: | https://d.repec.org/n?u=RePEc:fip:l00100:102817 |
| By: | Anyfantaki, Sofia; Migiakis, Petros; Petroulakis, Filippos; Giannakidis, Haris; Malliaropulos, Dimitris |
| Abstract: | Using granular security-level data from bond funds domiciled in the US and the euro area, we identify a market-based risk-taking channel of monetary policy transmission via the credit-risk and the maturity structure of bond funds’ portfolios. We measure credit risk at the fund level as the weighted average credit rating of the fund’s bond holdings. We find that accommodative monetary policies by the Fed and the ECB are associated with increased risk in bond funds’ portfolios. Interestingly, risk-taking is more pronounced for funds with longer-term holdings relative to short-term ones and unconventional monetary policy exerts stronger market-based risk-taking effects than interest rate policy. Finally, we find that Fed’s monetary policy has a stronger impact on funds’ risk-taking behaviour than the ECB’s, highlighting the dominant role of US monetary policy in global financial markets. JEL Classification: E52, G12, G15, G20 |
| Keywords: | investment funds, monetary policy, non-bank financial intermediation, risk-taking channel |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263196 |
| By: | Bletzinger, Tilman; Martorana, Giulia; Mistak, Jakub |
| Abstract: | Financial Conditions Indices (FCIs) are a widely used tool for assessing the broader monetary policy stance beyond the central bank’s direct control. This paper presents a novel vector autoregressive (VAR) model that includes key macroeconomic variables and maps financial variables into a single index, named Macro-Finance FCI. The VAR coefficients and the FCI weights are estimated jointly in one step, ensuring a model-consistent microfinance feedback. The model-implied long-run mean of the index provides a neutral benchmark to which financial conditions converge when inflation is at target and output is at potential. For the euro area, the proposed FCI incorporates nine asset prices – including risk-free rates, sovereign spreads, risk assets, and the exchange rate – and assigns a dominant role to nominal interest rates. It outperforms existing indices in out-of-sample forecasts of inflation and output. A structural identification of supply, demand, and financial shocks indicates that financial conditions require up to one year to transmit to the real economy and almost up to two years to inflation. JEL Classification: C32, E44, E52 |
| Keywords: | financial conditions index, monetary policy, structural macro-finance VAR |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263193 |
| By: | Burgert, Matthias; Darracq Pariès, Matthieu; Priftis, Romanos; Röhe, Oke; Rottner, Matthias; Silgado-Gómez, Edgar; Stähler, Nikolai; Durand, Luigi; González, Mario; Varga, Janos |
| Abstract: | This paper presents a novel model comparison to examine the challenges posed by changes in carbon-intensive energy prices for monetary policy. The employed environmental monetary models have a detailed multi-sector structure. The comparison assesses the effects of both a temporary and a permanent energy price increase with a particular focus on the euro area and the United States. Temporary and permanent price shocks are both inflationary. However, the inflationary impact of the permanent shock depends on the underlying model assumptions and monetary policy response. The analysis also establishes that these models share large commonalities in their quantitative and qualitative results, while also pointing out cross-country differences. JEL Classification: C54, E52, H23, Q43 |
| Keywords: | climate change, DSGE models, model comparison, monetary policy, multi-sector models |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263192 |
| By: | International Monetary Fund |
| Abstract: | Supportive external conditions and domestic policy tightening helped stabilize economic imbalances and the exchange rate (ER), though policies have eased recently. Stronger-than-expected activity in key partner countries boosted GDP growth in 2024−25:Q3, and, along with Chinese debt service deferrals, resilient FDI and favorable terms of trade, strengthened external balances and reserve accumulation. Tight monetary and fiscal policies in 2025, and monetary policy framework reforms, eased ER pressures and allowed rapid disinflation. However, monetary policy was eased in 2025:Q4 and the fiscal stance is projected to ease in 2026 relative to the stronger-than-expected 2025 primary surplus. |
| Date: | 2026–02–20 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfscr:2026/050 |
| By: | Berger, Allen N.; Karlström, Peter; Karolyi, Stephen A.; Ossandon Busch, Matias; Pinzon-Puerto, Freddy; Roman, Raluca A. |
| Abstract: | How does global banking impact financial stability and the real economy, particularly in emerging market economies? This paper revisits this question through the lens of new data and recent empirical findings in the banking literature. Considering this evidence, we illustrate how global banks are more prone to engaging in quantity and price credit rationing during crises, particularly when dealing with opaque borrowers abroad. However, in a context where shocks emerge in the real sector — for instance, through trade shocks — global banks can play a key role in making trade flows more resilient. We primarily use Latin America as our region of study as it is a region where globalization and deglobalization have had substantial impacts. Our findings support the notion that prudential financial stability frameworks can help to grasp the benefits of banking globalization while mitigating its downside risks. |
| Keywords: | international banking; global supply chains; financial stability; financial crises |
| JEL: | F15 F36 G15 G21 |
| Date: | 2026–02–23 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:130318 |
| By: | Akira Sasahara (Keio University) |
| Abstract: | This article provides an overview of three puzzles related to the gravity model of trade---the Glick–Rose puzzle, the border puzzle, and the missing globalization puzzle. It summarizes recent developments in estimation methods, including the shift from cross-sectional to panel settings, the inclusion of appropriate fixed effects, and the shift from log-linear specifications to nonlinear approaches. |
| Keywords: | The gravity model of trade, the Glick-Rose puzzle, the border puzzle, the missing globalization puzzle |
| JEL: | F14 F43 O47 |
| Date: | 2025–02–20 |
| URL: | https://d.repec.org/n?u=RePEc:keo:dpaper:dp2026-002 |