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on Open Economy Macroeconomics |
| By: | Kimberly A. Clausing; Maurice Obstfeld |
| Abstract: | The year 2025 brought a remarkable shift in the role of tariffs in the US economy, as the Trump administration simultaneously escalated the use of broad tariffs and ensured that Congress enacted large income tax cuts. This fiscal switch has important implications for the US tax system. While maintaining tariff rates at summer 2025 levels would generate large government revenues, such broad tariffs have significant downsides: Efficiency losses would approach one-third of revenues raised, the tax system would be less progressive, and there would be serious tax administration concerns. The fiscal shift also has significant macroeconomic implications, although probably not the intended ones. Broad tariffs generate a large negative supply shock, simultaneously raising prices and reducing macroeconomic activity. |
| JEL: | F13 F32 F38 F42 F52 H21 H23 H26 H68 L52 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34192 |
| By: | Hinh T. Dinh; Cuong Le Van |
| Abstract: | This paper develops a continuous-time optimal control model to analyze the economic effects of the U.S. administration’s newly imposed “reciprocal tariffs, ” which are determined by bilateral trade deficits. The model focuses on a small, open developing economy integrated into global value chains and facing limited policy space. We demonstrate how reciprocal tariffs, endogenously linked to the trade balance, affect production, consumption, capital accumulation, and overall welfare. We derive the full dynamic system, characterize its steady state, and explore the implications of domestic policy responses. The paper concludes with detailed policy recommendations for developing countries navigating this new trade environment, highlighting the roles of import substitution, export diversification, and regional cooperation in mitigating vulnerability to reciprocal tariffs. |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:ocp:rpaeco:rp08_25 |
| By: | Yi-Li Chien; Zhengyang Jiang; Matteo Leombroni; Hanno Lustig |
| Abstract: | We compute the cross-country transfers that result from unconventional monetary policy in the Eurozone. The ECB funds the expansion of its aggregate balance sheet mostly by issuing bank reserves and cash in core countries. The national central banks (NCBs) in periphery countries then borrow from the core NCBs at below-market rates to fund the asset purchases and bank lending. In addition, NCBs in the periphery lend more to their own banks at below-market rates. To compute the cross-country transfers, we compare the resulting cross-country distribution of NCB income to a counterfactual scenario without the ECB and without non-marketable intra-Eurozone debt. We document significant and persistent transfers from the core to the periphery. |
| JEL: | E42 E52 F33 G15 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34311 |
| By: | Nicolas Djob (CY Cergy Paris Université, THEMA) |
| Abstract: | We study optimal commodity taxation in an open economy with monopolistic competition and asymmetric fiscal capacity. In a two-country model, a supranational authority uses destination-based consumption taxes to finance public spending, correct market distortions, and redistribute across countries. We show that in the first-best, domestically produced goods are always subsidized, while cross-border tax differentials emerge based on relative labor valuations. In the second-best, when lump-sum transfers are unavailable, the optimal tax system resembles a pattern of asymmetric tariffs: goods from countries with lower marginal costs of public funds are subsidized, while more competitive trade directions are taxed. These results challenge the conventional neutrality of VAT under trade liberalization and suggest that differentiated tax treatment by origin can improve welfare. Our findings call for a reassessment of uniform VAT regimes, especially in economically asymmetric unions. |
| Keywords: | optimal taxation, monopolistic competition, fiscal asymetry, tariff equivalence, tax coordination, VAT |
| JEL: | F10 F13 H21 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ema:worpap:2025-13 |
| By: | Otaviano Canuto |
| Abstract: | The international monetary system has been dominated by the U.S. dollar since the Second World War. The hegemony of the greenback cut across the end of the dollar exchange standard established by the Bretton Woods Agreement, and came out from the global financial crisis—and the euro crisis—even stronger than before. The euro area and China are taking steps to strengthen the international role of their currencies, but surmounting the inner strength of the dollar-based monetary system cannot be taken for granted. This is visible in two aspects of the rising profiles of competitors to the dollar-based system: the growing use of local currencies in cross-border payments between China and other countries—particularly the BRICS— and the role played by the euro and the renminbi in cross-country financial safety nets. |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:ocp:rpaeco:pr07_25 |
| By: | David Beers; Obiageri Ndukwe; Joe Berry |
| Abstract: | The BoC–BoE database of sovereign debt defaults, published and updated annually by the Bank of Canada and the Bank of England, provides comprehensive estimates of stocks of government obligations in default. The 2025 edition highlights a decline in the US-dollar value of sovereign debt in default and provides more data about defaults on China’s official loans. |
| Keywords: | Debt management; Development economics; Financial stability; International financial markets |
| JEL: | F3 F34 G1 G10 G14 G15 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsan:25-24 |
| By: | Anaya Longaric, Pablo; Cera, Katharina; Georgiadis, Georgios; Kaufmann, Christoph |
| Abstract: | We explore whether investment funds transmit spillovers from local shocks to financial markets in other economies. As a laboratory we consider shocks to financialmarket beliefs about the probability of a rare, euro-related disaster and their spillovers to Asian sovereign debt markets. Given their geographic distance from and relatively limited macroeconomic exposure to the euro area, these markets are an ideal testing ground a priori stacking the deck against finding evidence for investment funds transmitting spillovers from euro disaster risk shocks. Analyzing proprietary security-level holdings data over the period from 2014 to 2023, we find that investment funds strongly shed Asian sovereign debt in response to euro disaster risk shocks. Markets with greater investment-fund presence exhibit considerably larger price spillovers. The main driver of this sell-off is the need to generate liquidity to meet investor redemption demands rather than portfolio rebalancing. Especially market liquidity determines which sovereign debt investment funds shed. Taken together, our findings suggest that due to a flighty investor base investment funds are powerful transmitters of spillovers from local shocks across global financial markets. JEL Classification: F34, F45, G23 |
| Keywords: | euro disaster risk shocks, investment funds, sovereign debt markets, spillovers |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253131 |
| 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: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:upf:upfgen:1907 |
| By: | Wagner Piazza Gaglianone; Jaqueline Terra Moura Marins; José Valentim Machado Vicente |
| Abstract: | This paper examines the relationship between interest rate differentials and exchange rate returns across different monetary regimes, with a particular focus on distinguishing between high- and low-interest-rate setups. Relying on a rich panel dataset comprising 46 countries and over two decades of monthly observations, we estimate panel models that allow for country-specific heterogeneity and regime-dependent dynamics. Thresholds separating regimes are constructed in a fully data-driven manner, including conditional and time-varying specifications. Our findings show that exchange rate elasticity with respect to interest rate differentials indeed depends on the regime and it is usually higher under low interest rates, a result consistent across several model specifications and robustness checks. A clustering analysis is also conducted to uncover groups of countries with similar FX dynamics, further highlighting the heterogeneous nature of currency responses across the international landscape. |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:bcb:wpaper:630 |
| By: | Tarek Alexander Hassan; Thomas M. Mertens; Jingye Wang; Tony Zhang |
| Abstract: | We develop a general-equilibrium model in which the safety of a country's currency and the choice of its exchange-rate regime arise endogenously. Calibrated to pre-2025 data, the model replicates the U.S. dollar’s safety premium, low Treasury yields, and its status as the world's anchor currency. Introducing a trade war that isolates U.S. goods markets from the world erodes the U.S. dollar's safety premium, raises U.S. interest rates, and lowers the world market value of U.S. firms. For sufficiently high tariffs, small economies optimally re-peg to the euro, precipitating a phase shift to a euro-centric international monetary system and a global welfare loss. The analysis implies that persistent trade wars may threaten the financial privileges the United States derives from the dollar’s international role. |
| JEL: | E22 E4 F1 F3 G12 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34332 |
| By: | Pablo Garcia (BANQUE CENTRALE DU LUXEMBOURG); Pascal Jacquinot (EUROPEAN CENTRAL BANK); Crt Lenarcic (BANKA SLOVENIJE); Kostas Mavromatis (DE NEDERLANDSCHE BANK); Niki Papadopoulou (EUROPEAN CENTRAL BANK); Edgar Silgado-Gómez (BANCO DE ESPAÑA) |
| Abstract: | We explore the macroeconomic effects of climate policies promoting the green energy transition in the euro area using an extended version of the Euro Area and Global Economy (EAGLE) model. The model differentiates between brown and green energy sectors and incorporates carbon taxes and brown capital income taxes. We analyze scenarios with unilateral and globally coordinated carbon taxes, with and without revenue redistribution to green firms and financially constrained households. Carbon taxes act as negative supply shocks, raising inflation and lowering output, while subsidies to green energy firms reduce green energy prices, supporting the transition and easing recessions. Redistribution to constrained households boosts consumption but does not accelerate the green transition. Taxes on brown capital income lower both inflation and output by acting as demand shocks. Recycling revenue from this tax to subsidize green capital investment strengthens the shift to green energy and moderates economic contractions. Global coordination of carbon taxes delivers only modest additional macroeconomic effects compared with unilateral action, as substitution in energy use outweighs international spillovers. Sensitivity analyses confirm the robustness of these findings under alternative assumptions about price rigidity, substitution elasticities and monetary policy. |
| Keywords: | climate policy, carbon taxation, fiscal policy, monetary policy, euro area, DSGE modeling |
| JEL: | C53 E32 E52 F45 H30 Q48 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2537 |
| By: | Kremens, Lukas; Martin, Ian; Varela, Liliana |
| Abstract: | We study exchange rate expectations in surveys of financial professionals and find that they successfully forecast currency appreciation at the two-year horizon, both in and out of sample. Exchange rate expectations are also interpretable, in the sense that three macrofinance variables—the risk-neutral covariance between the exchange rate and equity market, the real exchange rate, and the current account relative to GDP—explain most of their variation. But there is no “secret sauce” in expectations: after controlling for the three macro-finance variables, the residual information in survey expectations does not forecast currency appreciation in our sample. |
| JEL: | F3 G3 |
| Date: | 2025–09–29 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:127790 |
| By: | Mrs. Sandra Lizarazo; Brandon Joel Tan |
| Abstract: | The informal sector accounts for a large fraction of the economy and labor force in many emerging market and developing economies. This paper develops a dynamic stochastic general equilibrium model of a small open economy with an informal sector. Nominal price and wage rigidities are present in the formal sector, while prices and wages are flexible in the informal sector. Production of traded goods rely more on formal inputs (which can be produced at home or imported) while non-traded goods rely more on informal inputs. We show that, despite its costs, the informal sector can provide a flexible margin of adjustment in labor and product markets which helps buffer the impact of domestic and external shocks. |
| Keywords: | Informality; Shock Propagation |
| Date: | 2025–09–26 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/190 |
| By: | Zhengyang Jiang; Hanno Lustig; Stijn Van Nieuwerburgh; Mindy Z. Xiaolan |
| Abstract: | In a monetary union, the risk-free rate cannot adjust to country-level fiscal positions, leaving only default spreads and convenience yields to respond. Empirically, we find that convenience yields explain a large share of the variation in Eurozone sovereign bond yields. Eurozone sovereign bonds earn larger convenience yields when their governments run larger surpluses. Since convenience yields generate substantial seigniorage revenue from debt issuance, our estimates imply economically large fiscal costs from low convenience yields for peripheral countries in the Eurozone. |
| JEL: | E42 F33 G15 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34307 |