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on Open Economy Macroeconomics |
| By: | Felipe Benguria; Dennis Novy |
| Abstract: | How can a currency achieve more widespread international use? We study the internationalization of the Chinese renminbi (RMB) through the lens of a unique policy experiment in Argentina. In 2023, amid a severe dollar shortage, Argentina expanded a currency swap line with the People's Bank of China. Within the next few months, the share of imports from China invoiced in RMB surged rapidly to nearly 50% - displacing the US dollar, which had previously accounted for virtually all invoicing. Following the presidential election of late 2023, as macroeconomic policies changed and the dollar shortage eased, invoicing in RMB declined. We explore the mechanisms behind this aggregate pattern, using rich firm-level data on imports, bank-firm loan relationships, and bank balance sheets. Our results indicate that banks played a key role, in line with the dollar shortage narrative. First, firms with pre-existing relationships to banks with limited US dollar loans were more likely to switch to RMB. Second, firms borrowing from a Chinese state-owned bank were significantly more likely to use RMB. We also document firm-level spillovers, with RMB use for imports from China increasing the likelihood of RMB use for imports from other countries. Finally, we observe an effect on trade volumes. Firms switching to RMB saw increased total imports. |
| Keywords: | banking, central bank, china, geoeconomics, invoicing, lending, renminbi, swap, trade, US dollar |
| JEL: | E58 F14 F31 F33 G21 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11964 |
| By: | Carol Bertaut; Valentina Bruno; Hyun Song Shin |
| Abstract: | We highlight the role of duration and exchange rate risks on portfolio flows by using a unique and comprehensive database of US investor flows into emerging market government bonds denominated in local currency. Borrowing long-term mitigates roll-over risk but amplifies valuation changes that further interact with currency movements. Our analysis highlights the double-edged nature of long-term borrowing and draws attention to market stress dynamics due to strategic complementarities among mutual fund investors. |
| JEL: | F3 F65 G23 H63 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33816 |
| By: | Luis Fernando Melo-Velandia; José Vicente Romero; Diego Niño-Garavito |
| Abstract: | The Global Financial Cycle (GFC), defined as the fluctuations in international capital flows, asset prices, and risk appetite, has garnered significant attention from the recent international finance literature, market practitioners, and policymakers. This study employs a Dynamic Conditional Correlation (DCC) Copula model to examine the interaction between exchange rates for a group of seven developed economies and seventeen emerging market economies. Using these results and employing quantile panel data methods, we assess how the time-varying correlations of exchange rates behave in relation to variables associated with the GFC, specifically the VIX. The findings contribute to understanding the interconnectedness between time-varying international financial conditions and currency markets over time and during stress episodes, offering relevant implications for policymakers and market participants. *****RESUMEN: El Ciclo Financiero Global (GFC), definido como las fluctuaciones en los flujos internacionales de capital, los precios de los activos y el apetito por el riesgo, ha captado una atención significativa por parte de la literatura reciente en finanzas internacionales, los analistas de mercado y los responsables de política económica. En este estudio emplean modelos de Cópulas con Correlaciones Condicionales Dinámicas (DCC, por sus siglas en inglés) para examinar las correlaciones entre las tasas de cambio de un grupo de siete economías desarrolladas y diecisiete economías emergentes. A partir de estos resultados y utilizando métodos de datos de panel cuantílicos, se evalúa cómo se comportan las correlaciones dinámicas de las tasas de cambio frente a variables asociadas al GFC, en particular el índice VIX. Los hallazgos contribuyen a una mejor comprensión de la interconexión entre las condiciones financieras internacionales y los mercados cambiarios, tanto a lo largo del tiempo como durante episodios de estrés, ofreciendo implicaciones relevantes tanto para los responsables de política como para los participantes del mercado cambiario. |
| Keywords: | Dynamic conditional correlations, Elliptical copulas, Exchange rates, Global Financial Cycle, correlaciones condicionales dinámicas, cópulas elípticas, Tasas de cambio, Ciclo Financiero Global. |
| JEL: | C22 C46 F31 G15 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:bdr:borrec:1320 |
| By: | Emile A. Marin; Sanjay R. Singh |
| Abstract: | We show imperfect risk-sharing within countries can reconcile the aggregate cyclicality of exchange rates in a two-country setting, i.e. the Backus-Smith puzzle, as long as exchange rates are sufficiently risky with respect to idiosyncratic states. In equilibrium, these exchange rate dynamics require that, despite a country experiencing higher consumption growth, idiosyncratic risk remains relatively elevated. Furthermore, we identify distinct roles for market incompleteness both within and across countries, to match key moments of exchange rates. Turning to household-level data, we measure discount factor wedges which capture the effects of imperfect risk sharing, and we provide direct empirical support for the mechanism. |
| Keywords: | incomplete markets; heterogeneous agents; exchange rates |
| Date: | 2025–07–08 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:101230 |
| By: | Mr. Philip Barrett |
| Abstract: | We study how Chinese macroeconomic surprises affect global financial markets. Exploiting forecast errors around key data releases and a 60-minute window around the release, we show that positive industrial production (IP) surprises lead to immediate increases in Chinese and Asia-Pacific stock returns, global long-term yields, and commodity prices highly demanded by China. A complementary identification strategy, which builds on different time zones, confirms positive spillovers to international equity markets, with stronger effects in countries more exposed to Chinese trade. Our results highlight the role of both Hedging Premia and Growth Expectations in driving asset price comovement. The findings highlight China’s growing influence in global markets and position it as a driver of the Global Financial Cycle. |
| Keywords: | Spillovers; Global Financial Cycle; China; High-frequency |
| Date: | 2025–07–04 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/133 |
| By: | Busato, Francesco; Cisco, Gianluigi; De Simone, Marco; Marzano, Elisabetta |
| Abstract: | Climate change has led to an increase in extreme weather events, causing significant challenges for macroeconomic stability and monetary policy, particularly in small open economies (SOEs). This paper investigates the optimal monetary policy response to weather shocks in an SOE framework, using a Dynamic Stochastic General Equilibrium (DSGE) model calibrated for Turkey. The model includes sectoral price rigidities, trade openness, and climate-related productivity shocks affecting agricultural output. We evaluate alternative monetary policy rules, including those that target aggregate inflation, sector-specific inflation, and output stabilization. Our findings suggest that an aggressive monetary policy response to agricultural inflation mitigates short-term economic disruptions and accelerates recovery, albeit at the cost of a deeper initial contraction. The Ramsey-optimal policy prioritizes inflation stability while minimizing the long-term persistence of weather-induced output losses. Our results offer insights into the role of monetary policy in addressing climate-induced economic fluctuations in SOEs, highlighting the importance of tailored monetary policies that account for sectoral heterogeneities. |
| Keywords: | Agricultural output, Weather shocks, Dynamic Stochastic General Equilibrium Model |
| JEL: | E32 Q51 Q54 |
| Date: | 2025–03–17 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125175 |
| By: | Camila Gutierrez (International Monetary Fund); Javier Turen (Pontificia Universidad Catolica de Chile); Alejandro Vicondoa (Pontificia Universidad Católica de Chile) |
| Abstract: | We study how Chinese macroeconomic surprises affect global financial markets. Exploiting forecast errors around key data releases and a 60-minute window around therelease, we show that positive industrial production (IP) surprises lead to immediate increases in Chinese and Asia-Pacific stock returns, global long-term yields, andcommodity prices highly demanded by China. A complementary identification strategy, which builds on different time-zones, confirms positive spillovers to international equity markets, with stronger effects in countries more exposed to Chinese trade. Our results highlight the role of both Hedging Premia and Growth Expectations in driving asset price comovement. The findings support China’s growing influence in global markets and position it as a driver of the Global Financial Cycle. |
| Keywords: | Spillovers, Global Financial Cycle, China, High-frequency |
| JEL: | E44 F21 F30 F40 G15 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:aoz:wpaper:366 |
| By: | Apeti, Ablam Estel (EconomiX-CNRS, University of Paris Nanterre); Obeng, Samuel (Department of Economics, University of Warwick); Tagem, Abrams (African Tax Administration Forum (ATAF)); Were, Maureen (Research Department, Central Bank of Kenya) |
| Abstract: | Public debt has increased steadily over the years, leaving many countries at risk of debt distress and even pushing some to default. This paper analyses the impact of sovereign default on post-default debt-to-GDP ratios in 144 countries from 1980 to 2019. Applying the entropy balancing method, we provide robust evidence that sovereign defaults are associated with higher debt-to-GDP ratios. Furthermore, we find that the effect of default on debt is robust to alternative scenarios, empirical methods, and dynamic effects. We also provide evidence on the channels that underpin these findings and show that the impact of default on debt is through economic contraction (decreased economic growth) and reduced access to international financial markets. Finally, the findings show that both the presence of fiscal rules (and its constituent parts) and the strength of fiscal rules (that is, the credibility of the fiscal rules) are important in reducing the impact of default on debt. These findings underscore the importance of public debt management and domestic reforms to improve the long-term sustainability of debt. The findings also emphasize the importance of strong fiscal institutions and fiscal policy credibility in managing the complexities of debt accumulation. |
| Keywords: | Debt ; entropy balancing ; fiscal rules ; sovereign default JEL Codes: F34 ; F63 ; H63 |
| URL: | https://d.repec.org/n?u=RePEc:wrk:warwec:1567 |
| By: | Hermes, Felix; Schmeling, Maik; Schrimpf, Andreas |
| Abstract: | We analyze the international dimension of repo markets using novel euro area regulatory microdata. Our findings highlight the deep integration of funding markets across the Atlantic and the US dollar’s outsized role. Our paper documents five key facts: (1) US dollar repos by euro area entities account for approximately 40% of total volumes and are comparable in size to euro repos; (2) term repos (with maturities beyond one day) are quantitatively more relevant than commonly thought, especially non-centrally cleared ones; (3) repo markets have become more collateral-driven, involving diverse nonbank financial players and trading motives; (4) banks’ intragroup transactions form a large share of non-centrally cleared volumes; and (5) haircuts, even for riskier collateral, are often zero or negative, especially in euro trades. We show in two empirical applications that US monetary policy shocks spill over to euro repo rates and that negative haircuts arise from market power and collateral demand dynamics. JEL Classification: G12, G14 |
| Keywords: | bank intermediation, haircuts, repo market, US dollar funding |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253065 |
| By: | Irigoin, Alejandra |
| Abstract: | By specifying the specie on which returns were to be repaid respondentia was a ubiquitous financial instrument to carry international trade in which silver was “essential” for its continuation. Where multiple currencies existed and silver was the preferred money, imported silver species performed as foreign currency. Thus, the import of foreign coins created issues for prices, profits and exchange rates. Eighteenth century Europeans alternatively used respondentia or bills depending on the monetary context, casting a shade of doubt on the inherent efficiency of a cashless means of payment. Until the 1820s, private bills of exchange did not circulate where cash had a premium. Europeans developed means to regulate the price of foreign coins and exchange rates. Elsewhere respondentia allowed to hedge against exchange risk and propitiated arbitrage profits, giving an advantage over bills. The article documents the global scope of the instrument; it explains the exchange nature of the contract and explores the issues that respondentia came to solve. It highlights the role of monies of account Europeans used in pricing foreign currencies in international trade. |
| Keywords: | private maritime trade finance; early modern global commerce; exchange risk; monies of account |
| JEL: | N20 F31 G23 G14 |
| Date: | 2025–04–29 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:128607 |
| By: | Antoine Cornevin (Geneva Graduate Institute (IHEID), Department of International Economics) |
| Abstract: | I study the impact of domestic and foreign geopolitical risk (GPR) on economic expectations, and how trade linkages affect the transmission of foreign risks. Using monthly professional forecasts since 1995, I start by estimating the effect of GPR events on the distribution of expectations across 32 advanced and developing economies. I find that while changes in GPR do not shift median GDP forecasts, they increase their dispersion. I then assess how trade substitutability and concentration influence the cross-country transmission of GPR. I construct new countrylevel indicators based on granular product-level trade data and find that countries which have exports that are easy to substitute (the international demand for these exports is elastic) are more affected by foreign GPR shocks. Perhaps surprisingly, for these countries, foreign GPR shocks dominate domestic GPR shocks. |
| Keywords: | Geopolitical risks; economic expectations; uncertainty; trade linkages |
| JEL: | F14 F41 F51 E37 D84 |
| Date: | 2025–07–07 |
| URL: | https://d.repec.org/n?u=RePEc:gii:giihei:heidwp11-2025 |
| By: | Ms. Alina Carare; Juan P Celis; Metodij Hadzi-Vaskov; Yasumasa Morito |
| Abstract: | Growing remittance flows to emerging and developing economies may lead to real exchange rate appreciation and weaken their competitiveness. While the empirical literature finds mixed results about the relevance of this relationship, it does not delve into understanding the interplay of two crucial elements for policymakers—the exchange rate regime and the structure of the economy. Filling this gap in the literature, our paper examines how exchange rate regimes and the structure of the economy affect the impact of remittance flows on the real effective exchange rate (REER). Using data from a large sample of economies over 2008-21, we arrive at three key findings. First, REER overvaluation correlates positively with remittance flows under flexible exchange rate regimes. Once controlling for potential endogeneity in a dynamic panel and other variables determining exchange rate behavior, we find that countries with fixed exchange rate regimes also experience appreciation, albeit smaller and slower relative to countries under flexible regimes. Second, we find relatively larger REER appreciation effects for countries that have import-to-GDP ratios lower than the world median, and countries with remittances-to-GDP ratios higher than the world median. Third, for countries that receive relatively high remittances and import relatively less, the REER appreciates after a remittance shock, regardless of the exchange rate regime. The results are robust to alternative classifications, data sources, specifications and sample size. |
| Keywords: | Remittance; Real Exchange Rates; Dutch disease |
| Date: | 2025–06–20 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/122 |
| By: | Boitier, Alvaro; Stracca, Livio |
| Abstract: | This paper investigates the impact of foreign exchange (FX) shocks on income inequality across 31 European countries from 2003 to 2021. Leveraging a unique database of household-level longitudinal data from the European Union Statistics on Income and Living Conditions (EU-SILC) and exchange rate data from the Bank of International Settlements, we investigate how currency devaluations and appreciations influence income distribution. Our findings indicate that a 1% currency devaluation decreases income inequality by 15 basis points within one year, while appreciations have the reverse effect. Contrary to previous studies focused on Latin America, which credit reductions in inequality to both labor mobility and union influence, our analysis identifies labor mobility as the primary factor in Europe. Furthermore, we discover that income changes are predominantly driven by variations in income per hour rather than hours worked. JEL Classification: F31, F41, F44 |
| Keywords: | EU-SILC, foreign exchange, income inequality, labor mobility |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253067 |
| By: | Joel P. Flynn; Antoine B. Levy; Jacob Moscona; Mai Wo |
| Abstract: | This paper studies how innovation reacts to foreign political risk and shapes its economic consequences. In a model with foreign political shocks that can disrupt the supply of foreign inputs, we show that greater political risk abroad increases domestic innovation, thereby lowering reliance on risky sourcing countries. We then combine data on sector-level technology development with time-varying measures of industry-level exposure to foreign political risk and report three sets of empirical findings. First, sectors and commodities with higher exposure to foreign political risk exhibit significantly greater innovative activity. This finding holds across sectors in the US, across country-sector pairs in a global sample, and across critical minerals that are essential for modern economic activity. Second, the response of innovation is particularly strong when risk emanates from geopolitical adversaries. This is consistent with our finding that trade restrictions are more likely to emerge between non-allies following a rise in political risk in either country. Third, directed innovation reduces countries’ reliance on imports from risky foreign markets. In doing so, technological change amplifies the negative effects of domestic political risk on export performance. |
| JEL: | F50 O3 O31 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33964 |
| By: | Christian Bayer (University of Bonn, CEPR, CESifo, & IZA); Alexander Kriwoluzky (Freie Universität Berlin & DIW Berlin); Gernot J. Müller (University of Tübingen, CEPR, & CESifo); Fabian Seyrich (Frankfurt School of Finance & Management & DIW Berlin) |
| Abstract: | Attitudes toward fiscal policy differ: "fiscal conservatism" and "fiscal liberalism" vary in their willingness to tolerate budget deficits. We challenge the view that such attitudes reflect national preferences. Instead, we offer an economic explanation based on a two-country Heterogeneous Agent New Keynesian model, bringing its implicit political economy dimension to the forefront. We compute the welfare implications of alternative fiscal policies at the household level to assess the conditions under which a policy commands majority support. Whether the majority supports fiscal conservatism or liberalism depends on a country’s debt level, its wealth distribution, and the nature of the economic shock. |
| Keywords: | HANK, Two-country model, Political Economy, Government debt, Fiscal policy, household heterogeneity |
| JEL: | E32 H63 F45 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:ajk:ajkdps:368 |
| By: | Goldbach, Stefan; Nitsch, Volker |
| Abstract: | This paper examines the effect of national government response measures to Covid-19 on German international capital flows. Analyzing highly disaggregated monthly data from the German balance of payments statistics over the period from January 2019 through January 2021, we find that bilateral financial interactions are negatively affected by stricter containment and closure policies as well as health system policies of a partner country, while German capital flows benefit from a partner’s economic support policies. Moreover, to the extent that public interventions to fight the pandemic affect financial interactions, the adjustment mainly takes place along the intensive margin. |
| Date: | 2025–06–24 |
| URL: | https://d.repec.org/n?u=RePEc:dar:wpaper:155480 |