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on Open Economy Macroeconomics |
| By: | Yan Bai; Patrick J. Kehoe; Pierlauro Lopez; Fabrizio Perri |
| Abstract: | Emerging markets face large and persistent fluctuations in sovereign spreads. To what extent are these fluctuations driven by local shocks versus financial conditions in advanced economies? To answer this question, we develop a neoclassical business cycle model of a world economy with an advanced country, the North, and many emerging market economies, the South. Northern households invest in domestic stocks, domestic defaultable bonds, and international sovereign debt. Over the 2008-2016 period, the global cycle phase, the North accounts for 68% of Southern spreads' fluctuations. Over the whole 1994-2024 period, however, Northern shocks account for less than 20% of these fluctuations. |
| Keywords: | international business cycles; sovereign debt; default; long run risk; Epstein-Zin preferences; global banks; global cycles |
| JEL: | E32 F44 G15 H63 |
| Date: | 2025–02–25 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedcwq:99613 |
| By: | Sushant Acharya; Ozge Akinci; Silvia Miranda-Agrippino; Paolo Pesenti |
| Abstract: | In the literature on monetary policy spillovers considered in the two previous posts, countries that would otherwise operate independently are connected to one another through bilateral trade relationships, and it is assumed that there are no frictions in currency, financial, and asset markets. But what if we introduce a number of real-world complexities, such as a dominant global currency and tight linkages across international capital markets? Given these additional factors, is it still possible to draw generalized conclusions about international policy spillovers—and can we still think of them as a fundamentally bilateral phenomenon? In our third and final post, we explore these questions by focusing on two key elements in the determination of international policy spillovers: the U.S. dollar and the Global Financial Cycle. |
| Keywords: | Global spillovers |
| JEL: | E32 E44 F41 |
| Date: | 2025–04–07 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:99795 |
| By: | Mauricio Stern |
| Abstract: | This paper analyzes the effect of commodity price fluctuations on a commodity-exporting economy. Using Chilean and international copper market data, I find that positive copper price changes resulting from copper-specific demand shocks generate a broad GDP expansion, with no visible decline in manufacturing exports. These results provide evidence against the Dutch disease hypothesis, which posits the crowding-out effect of commodity price increases on the manufacturing sector. I then estimate a small open economy business-cycle model and find that a low degree of substitution between domestic and foreign goods explains the positive sectoral effect of a commodity price shock. Finally, I evaluate how tariffs on imports determine the volatility of total output in response to commodity price shocks, and find that lower tariffs reduce the volatility of total production when commodity prices fluctuate. |
| Keywords: | Commodity exporting economy;International market shocks;Dutch disease;Elasticity of substitution |
| JEL: | E32 F13 F14 F16 F31 F41 F44 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:bdm:wpaper:2025-06 |
| By: | Sangyup Choi (Yonsei University); Jongho Park (Soongsil University); Kwangyong Park (Sogang University) |
| Abstract: | What accounts for cross-country heterogeneity in exchange rate responses to U.S. monetary policy shocks? Using high-frequency data around Federal Open Market Committe (FOMC) announcements, we document that countries with deeper financial markets—proxied by the size of foreign portfolio liabilities—experience larger currency depreciations following U.S. monetary tightening. This effect is particularly strong for forward guidance shocks relative to conventional interest rate surprises. To rationalize these findings, we extend the gradual portfolio adjustment model by introducing a forward-looking news shock and allowing portfolio adjustment costs to decline with financial market depth. The model replicates our empirical findings, offering a unified explanation for heterogeneous short-run exchange rate dynamics. |
| Keywords: | Exchange rates; Monetary policy spillovers; Portfolio adjustment frictions; Forward guidance; Daily data |
| JEL: | E52 F31 F41 G11 G17 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:yon:wpaper:2025rwp-240 |
| By: | Stefan Avdjiev; Leonardo Gambacorta; Linda S. Goldberg; Stefano Schiaffi |
| Abstract: | The period after the Global Financial Crisis (GFC) was characterized by a considerable risk migration within global liquidity flows, away from cross-border bank lending towards international bond issuance. We show that the post-GFC shifts in the risk sensitivities of global liquidity flows are related to the tightness of the balance sheet (capital and leverage) constraints faced by international (bank and nonbank) lenders and to the migration of borrowers across funding sources. We document that the risk sensitivity of global liquidity flows is higher when funding is provided by financial intermediaries that are facing greater balance sheet constraints. We also provide evidence that the post-GFC migration of borrowers from cross-border loans to international debt securities was associated with a decline in the risk sensitivity of global liquidity flows to EME borrowers. |
| Keywords: | global liquidity; international bank lending; international bond flows; emerging markets; advanced economies |
| JEL: | G10 F34 G21 |
| Date: | 2025–04–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:99824 |
| By: | Sushant Acharya; Ozge Akinci; Silvia Miranda-Agrippino; Paolo Pesenti |
| Abstract: | As covered in the first post in this series, the international transmission of monetary policy shocks features positive output spillovers when the so-called expenditure-switching effect is sufficiently large. Departing from textbook analysis, this post zooms in on the implications of differences across market participants with respect to their consumption preferences and ability to insure against income risk. The key message is that these features can, at least theoretically, change the impact of spillovers from positive to negative as well as alter their overall magnitude. These aspects of the international transmission mechanism are especially relevant when addressing spillovers from advanced to emerging economies. |
| Keywords: | Global spillovers |
| JEL: | E32 E44 F41 |
| Date: | 2025–04–07 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:99794 |
| By: | Sushant Acharya; Ozge Akinci; Silvia Miranda-Agrippino; Paolo Pesenti |
| Abstract: | Understanding cross-border interdependencies and inspecting the international transmission mechanism of policy shocks is the raison d’être of open-economy macroeconomics as an intellectual discipline. The relevance for the policy debate is pervasive: over and over in the history of the international monetary system national policymakers have pointed at — and voiced concerns about—the effects of policy actions undertaken in foreign countries on the outlook and financial conditions in their own domestic economies. The most recent example involves the spillovers of tighter monetary policies aimed at addressing the inflationary spikes associated with the COVID-19 pandemic. In this three-part series, we provide a non-technical introduction to the multifaceted literature on global spillovers, building in particular on our own research. This post introduces the subject and offers an overview of the classic transmission channels. |
| Keywords: | spillovers |
| JEL: | E32 E44 F41 |
| Date: | 2025–04–07 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:99793 |
| By: | Tsvetelina Nenova |
| Abstract: | This paper provides novel empirical evidence on portfolio rebalancing in international bond markets through the prism of investors' demand for bonds. Using a granular dataset of global government and corporate bond holdings by mutual funds domiciled in the world's two largest currency areas, I estimate heterogeneous and time varying demand elasticities for bonds. Safe assets such as US Treasuries or German Bunds face especially inelastic demand from investment funds compared to riskier bonds. But spillovers from these safe assets to global bond markets are strikingly different. Funds substitute US Treasuries with global bonds, including risky corporate and emerging market bonds, whereas German Bunds are primarily substitutable within a narrow set of euro area safe government bonds. Substitutability deteriorates in times of stress, impairing the transmission of monetary policy. |
| Keywords: | international finance, portfolio choice, safe assets |
| JEL: | F30 G11 G15 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1254 |
| By: | Betz, Timm (Washington University in St. Louis); Pond, Amy |
| Abstract: | The ability to borrow is important for government survival. Governments routinely resort to policies that privilege their own debt on financial markets, exploiting their dual role as borrowers and regulators. These borrowing privileges nudge investors to hold the government's own debt. They share similarities with prudential regulation, but skew the market in favor of the government's debt; and they share similarities with financial repression, but are less severe and thus consistent with the growth of financial markets. Introducing the first systematic dataset documenting the use of such policies across countries and over time, we demonstrate that governments implement borrowing privileges when their interactions with the global economy heighten fiscal needs: when borrowing costs indicate tightened access to credit, when trade liberalization undercuts revenue, and where fixed exchange rates increase the value of fiscal space. Despite the mobility of financial assets and constraints from global markets, governments retain latitude in regulating domestic markets to their own fiscal benefit. |
| Date: | 2025–03–26 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:gr37y_v1 |
| By: | Marco Garofalo; Giovanni Rosso; Roger Vicquéry |
| Abstract: | This paper studies the effect of financial sanctions on the dominance of the US dollar in global credit markets. In the aftermath of the invasion of Crimea in 2014, sanctions imposed by both the US and the EU restricted the provision of financial services to Russian firms. We document how, between 2014 and 2021, the share of global cross-border credit to Russia denominated in US dollars declined from 65% to 25%, while the share denominated in euros rose from 20% to 45%. Relying on confidential bank-level data covering the universe of global banks located in the UK, we show that this shift was driven by banks previously lending to Russia in US dollars, and that banks shifted to euro lending to Russia regardless of whether their ultimate owner was based in a sanctioning jurisdiction or not. We argue that this euroisation relates to an increase in the relative “settlement risk” of US dollar claims, in the context of US extra-territorial sanctions targeting the dollar payment system. We rationalise our findings in a three-country model with financial intermediaries, where sanctions are introduced as both jurisdiction and currency-circuit specific frictions. |
| Date: | 2025–04–15 |
| URL: | https://d.repec.org/n?u=RePEc:oxf:wpaper:1079 |