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on Open Economy Macroeconomics |
| By: | Giancarlo Corsetti; Keith Kuester; Gernot J. Müller; Sebastian Schmidt; Ben Schumann |
| Abstract: | We confront the notion that flexible exchange rates insulate countries from external disturbances with new evidence for the euro area (EA) and 20 of its neighbors. Using high-frequency data, we first establish that countries with flexible exchange rates (“floats”) let their currencies depreciate in response to EA monetary policy shocks, while“pegs” raise interest rates. Yet at business cycle frequency, these depreciations do not translate into insulation: floats contract just as much as pegs—not only in response to monetary policy shocks but also to other shocks originating in the EA. This result appears puzzling in light of received wisdom, but we show that it can be rationalized within a state-of-the-art HANK model and flesh out the underlying transmission channels. |
| Keywords: | Exchange-rate regime, Insulation, External shock, Exchange-rate disconnect, Monetary Policy |
| JEL: | F41 F42 E31 |
| Date: | 2026–05–05 |
| URL: | https://d.repec.org/n?u=RePEc:bdp:dpaper:0096 |
| By: | Domenech Palacios, Mar; Ehrmann, Michael; Ferrari Minesso, Massimo; Mehl, Arnaud; Comazzi, Fabio |
| Abstract: | We revisit the debate on the effectiveness of central bank communication on exchange rates, contrasting a skeptical view, which holds that communication neither moves exchange rates nor influences them in the desired direction, with an optimistic view that it does. Using nearly 100 official ECB statements on exchange rates made during its monetary policy press conferences since 2002, we show that the ECB tends to mention the exchange rate when the real effective exchange rate deviates from its equilibrium value, whereas journalists’ questions are mainly responsive to the nominal exchange rate. Studying the effects of these mentions, our findings by and large support the skeptical view: after controlling for monetary policy shocks, exchange rate communication has limited immediate effects on the euro exchange rate, which fade quickly. Effectiveness is particularly limited when interest rates are at their effective lower bound. JEL Classification: E52, E58, F31, O24 |
| Keywords: | central bank communication, exchange rates, high frequency identification, natural language processing |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263229 |
| By: | Ryan Niladri Banerjee; Lena Boneva; Gabor Pinter; Vladyslav Sushko |
| Abstract: | Carry trade activity can shape the exchange rate response to monetary policy. Significant short positions of carry traders in funding currencies amplify the impact of policy tightening. This amplification arises from the unwinding of leveraged carry trade positions accumulated prior to the policy announcement, creating a state-dependent monetary policy transmission to the exchange rate. The currency trading strategies of hedge funds and other leveraged investors can play a key role in shaping the exchange rate response to monetary policy and therefore warrant careful monitoring. |
| Date: | 2026–05–06 |
| URL: | https://d.repec.org/n?u=RePEc:bis:bisblt:124 |
| By: | João Carlos Lopes |
| Abstract: | The great recession of 2008/2009 and the subsequent sovereign debt crisis highlighted the existence of deep structural imbalances in the Eurozone: large differences of competitiveness and growth potential between its northern (core) and southern (peripheral) countries. In this paper, an input-output approach is used to study two important facets of this phenomenon, namely the nexus between current account (trade) imbalances and domestic (final) demand levels, as well as the sectoral specialization of tradable goods and services production. In the uncompetitive (current account deficit) economies of southern euro area, domestic final demand levels before the crisis were excessive and the opposite occurred in the strong, competitive economies of the north. These external imbalances were closely associated with a pattern of specialization favourable to the northern euro area countries (sectors with higher value added and more intensive technological activities). The empirical results of the paper for the period before the crisis, are based on input-output tables for several years: 1995, 2000, 2005 and 2011, available in the World Input Output Database. The northern euro area group is formed by Germany, Netherlands Finland and Ireland. The southern one is the so-called GIPS group (Greece, Italy, Portugal and Spain). After the (Troika) adjustment programs of 2011/2014, the external imbalances were overcome, by a strong demand compression initially and an export led orientation thereafter. This correction is shown for the Portuguese case, using 2013 and 2017 inputoutput tables for this country and a comparison is made with Germany, the reference country of the core Eurozone group. |
| Keywords: | Trade imbalances; Domestic demand; Export composition; Input-output linkages; Eurozone; Portugal. |
| JEL: | F40 C67 D57 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:ise:remwps:wp04162026 |
| By: | Mario Larch; Leandro Navarro; Dennis Novy |
| Abstract: | International trade flows show strong persistence over time. Standard static gravity models cannot rationalize this persistence and lack a micro-foundation for including lagged trade flows as a determinant of current trade. We develop a structural dynamic gravity framework in which persistence arises from firms' sluggish adjustment of destination-specific prices, analogous to sticky prices in macroeconomics but operating at the bilateral level. The model delivers a gravity equation with lagged trade flows as a structural feature rather than an ad hoc add-on. We propose a novel estimation approach for dynamic gravity models that explicitly accounts for persistence. Empirically, we show that ignoring persistence can lead standard gravity estimates to substantially understate the effects of trade policy changes. As an application, we find that the estimated trade impact of regional trade agreements can increase by 30 percent or more once persistence is taken into account. |
| Keywords: | Dynamic gravity, persistence, sluggish price adjustment, sticky prices, RTA, trade costs |
| JEL: | E31 F13 F14 F41 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:crm:wpaper:26116 |
| By: | Hinh T. Dinh |
| Abstract: | This paper revisits Big Push industrialization theory in the context of open economies deeply integrated into global value chains (GVCs). While classical Big Push models emphasize demand complementarities and coordination failures in largely closed economies, many middle-income countries now industrialize through foreign-owned, import-intensive production networks. We develop an extended Big Push framework that incorporates GVC integration and import leakage, and show how these features can prolong the middle-income trap, despite rapid manufacturing expansion. Importantly, the analysis shows that without careful and well-designed industrial policy, large-scale investment programs inspired by Big Push logic may unintentionally reinforce import leakage, rather than generate self-reinforcing domestic demand spillovers. In this case, a Big Push can prolong the middle-income trap and lead to adverse outcomes. We characterize the conditions under which the domestic modern industry is left unviable, derive the critical industrial-policy threshold required to redirect domestic demand toward local production, and establish welfare rankings across alternative development strategies. Using a panel of ten middle-income economies from 1989 to 2024, we provide empirical evidence consistent with the model’s predictions: greater trade openness and higher investment-income payments are associated with systematically larger GDP-GNI wedges, reflecting structural income leakage rather than transitory price effects. Distributed-lag estimates show that investment-income outflows affect the wedge immediately, while trade integration operates with longer lags. The results imply that GVC participation alone does not guarantee national income convergence, and that successful late industrialization requires deliberate policy sequencing to convert export-led growth into domestic value capture. |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:ocp:rtrade:rp_01-26 |
| By: | Uraku Yoshimoto (Faculty of International Social Sciences, Yokohama National University, Japan); Kiyotaka Sato (Faculty of International Social Sciences, Yokohama National University, Japan); Taiyo Yoshimi (Faculty of Economics, Chuo University, Japan); Takatoshi Ito (School of International Relations and Public Policy, Columbia); Junko Shimizu (Faculty of Economics, Gakushuin University, Japan); Yushi Yoshida (Faculty of Economics, Shiga University, Japan) |
| Abstract: | This study examines the determinants of invoice currency choice in Japanese export transactions to Thailand, utilizing granular data from Japan Customs. A key contribution of this study is its examination of how the ownership ratio (OSR) of Thai importers influences invoice currency choice in exports by Japanese complete car manufacturers and their subsidiaries. The empirical analysis reveals that a higher OSR of Thai importers is associated with a decreased likelihood of yen-denominated transactions. Furthermore, this study explores how invoice currency preferences diverge across different trade channels, including intra-firm trade. The findings reveal distinct patterns: parent companies predominantly prefer U.S. dollar-invoiced exports, whereas domestic subsidiaries—constrained by their limited capacity to manage exchange rate risks—exhibit a strong preference for yen-invoiced exports. These results underscore the significant differences in invoice currency strategies across trade channels. Notably, the analysis suggests that parent companies strategically select invoice currencies—whether yen or foreign currencies—as part of a broader effort to protect their foreign subsidiaries from exchange rate volatility, reflecting a deliberate approach to centralized risk management. |
| Keywords: | Ownership ratio, Invoice currency, Intra-firm trade, Overseas subsidiaries, Japan Customs transaction data |
| JEL: | F14 F23 F31 |
| URL: | https://d.repec.org/n?u=RePEc:mof:wpaper:ron385 |
| By: | J. Scott Davis |
| Abstract: | The U.S. net foreign asset position—the value of foreign assets held by U.S. residents minus the value of U.S. assets held by foreign residents—has fallen sharply since the 2008 Global Financial Crisis. |
| Keywords: | equity prices; international economics; United States |
| Date: | 2024–11–12 |
| URL: | https://d.repec.org/n?u=RePEc:fip:d00001:99107 |
| By: | Pawel Krolikowski; Andrew H. McCallum |
| Abstract: | We study tariffs in a general equilibrium dynamic model with search frictions between heterogeneous exporting producers and importing retailers. We show the model has a unique equilibrium and analytically characterize home unilateral import tariffs that maximize welfare given a passive foreign country. Search frictions add two terms to the standard optimal tariff expression: One lowers tariffs when contact rates are low; another when private export costs exceed social opportunity costs. Search frictions also introduce new incentives to subsidize imports due to market thickness effects. We calibrate our baseline to U.S. and Chinese 2016 data. We compare this baseline to a counterfactual with international search costs reduced to domestic levels but with all other parameters fixed. We find that higher baseline search costs reduce optimal U.S. unilateral and Nash tariffs and attenuate welfare responses to tariff changes. |
| Keywords: | international trade; trade policy; search and matching models; general equilibrium models; welfare economics |
| JEL: | C78 D62 D83 F12 F13 |
| Date: | 2026–05–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:103194 |
| By: | Lutz Kilian; Michael D. Plante; Alexander W. Richter |
| Abstract: | Notwithstanding the attention geopolitical events in oil markets have attracted, we find that geopolitical oil price risk is unlikely to generate sizable recessionary effects. |
| Keywords: | energy; oil prices; international economics |
| Date: | 2025–02–18 |
| URL: | https://d.repec.org/n?u=RePEc:fip:d00001:99566 |
| By: | Lagarda, Guillermo; Verastegui Lira, Paulina |
| Abstract: | Does Financial Action Task Force (FATF) grey-listing disrupt cross-border financial flows? The answer is not obvious. Grey-listing imposes no formal transaction restrictions, yet it can trigger compliance responses by financial institutions facing heightened regulatory risk and the prospect of future blacklisting. Identification is further complicated by anticipation, as firms may adjust during the evaluation process, attenuating observed changes at the time of designation. We combine banking transactions, balance-of-payments capital flows, and foreign-exchange data with complementary identification strategies to isolate the incremental impact of formal grey-listing. To address high-dimensional confounding and separate medium-run adjustments from announcement-driven dynamics, we pair Double Debiased Machine Learning estimates in a fixed-effects panel with a Regression Discontinuity in Time design that exploits the sharp publication timing of FATF decisions. Across approaches, grey-listing produces economically meaningful contractions in inflows: banking and capital inflows fall by 1.3--2.6 percent of quarterly GDP, while outflow responses are smaller and less robust. Regression discontinuity estimates corroborate these results, showing a 1.2--1.4 percentage point drop in inflows at the listing cutoff. Delisting triggers only partial recovery (40--70 percent), consistent with persistent frictions in correspondent banking relationships. |
| Keywords: | FATF grey-listing;International Financial Regulation;Compliance;Correspondent banking |
| JEL: | C14 F21 F36 F38 G15 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:14581 |
| By: | Enrique Martínez García; Mark A. Wynne |
| Abstract: | During a presentation and discussion hosted by the Global Institute last month, Steve Kamin discussed how tariffs, volatility and evolving payment technologies are challenging—but not yet dislodging—the dollar’s position as a reserve currency at the center of the global financial system. |
| Keywords: | dollar; payment technology; international economics |
| Date: | 2025–12–31 |
| URL: | https://d.repec.org/n?u=RePEc:fip:d00001:102538 |
| By: | Mariam Camarero (University Jaume I and INTECO, Department of Economics, Campus de Riu Sec, E-12080 Castellón, Spain.); Antonia López-Villavicencio (Department of Applied Economics, Building B, Office: B3-052, Universitat Autònoma de Barcelona, 08193 Bellaterra, Barcelona, Spain.); Cecilio Tamarit (niversity of València and INTECO, Department of Applied Economics II, Av. dels Tarongers, s/n Eastern Department Building, E-46022 Valencia, Spain.) |
| Abstract: | This paper examines how participation in global value chains (GVCs) shapes in- flation in the European Union over 1995–2023. Using local projections, we trace the dynamic response of inflation to total, backward and forward GVC shocks, at the aggregate level and across core, peripheral and CEEC economies. GVC integra- tion is, on average, disinflationary, supporting the discipline-on-prices hypothesis. The aggregate result, however, masks substantial heterogeneity: backward sourcing dampens prices in core and CEEC countries, forward linkages generate demand-pull in core suppliers and competitive discipline in CEECs, while peripheral economies behave as price-takers. Results are robust to first-differencing. |
| Keywords: | Global value chains; inflation; Phillips curve; local projections; European Union. |
| JEL: | E31 F14 F41 F62 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:eec:wpaper:2609 |
| By: | J. Scott Davis; Pon Sagnanert |
| Abstract: | The purchasing power parity theory of exchange rates is easily understood: A basket of goods should have the same price in different markets when that price is expressed in a common currency. However, the relationship between market-determined exchange rates and inflation shocks is not always straightforward. In the short run, central bank transparency can become an important determinant. |
| Keywords: | exchange rates; international economics; inflation; monetary policy |
| Date: | 2024–09–03 |
| URL: | https://d.repec.org/n?u=RePEc:fip:d00001:98757 |
| By: | Mariana Escobar; Lorenzo Pandolfi; Alvaro Pedraza; Tomas Williams |
| Abstract: | Benchmark index rebalancings are widely used to study non-fundamental demand shocks, but the underlying trading is rarely observed. Exploiting transaction-level data from the Colombian stock market and additions and deletions of stocks from MSCI international equity indexes, we trace who generates benchmark-driven demand, who absorbs it, and how it affects prices. Index demand extends beyond explicit index funds and ETFs: benchmarked but nominally active foreign institutions account for most rebalancing-driven trading. Domestic investors absorb most of the shock, while arbitrage capital plays only a limited role. We show that stock demand curves are steep, especially when retail participation is larger. |
| Keywords: | index rebalancings; institutional investors; stock demand elasticity; passive funds; benchmarking; inelastic market hypothesis. |
| JEL: | F32 G11 G15 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:gwc:wpaper:2026-008 |
| By: | Budnik, Katarzyna |
| Abstract: | Free movement of labour across borders can influence business cycle dynamics in the affected countries. This paper studies the macroeconomic implications of temporary migration using a two-country dynamic stochastic general equilibrium model calibrated to represent the “old” EU Member States (EU15) and the “new” Member States (NMS12). The model introduces fully endogenous temporary migration and combines it with search-and-matching frictions in labour markets. Workers migrate temporarily in response to differences in labour market conditions and wages, allowing productivity shocks to affect local labour supply. The results show that productivity shocks in the host economy attract temporary migrants and increase labour supply. This migration response amplifies output fluctuations while leaving inflation dynamics largely unaffected. Migration also smooths wage responses but increases the volatility of employment. At the same time, temporary migration dampens the macroeconomic effects of productivity shocks in the sending economy by redistributing labour across regions. These findings highlight the role of labour mobility as an adjustment mechanism within an integrated economic area and suggest that cross-border migration can significantly shape business cycle dynamics in Europe. JEL Classification: E20, E32, F16, F22, F41 |
| Keywords: | business cycle, dynamic stochastic general equilibrium model, EU enlargement, integration, labour market, labour migration |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263226 |
| By: | Diego Vallarino |
| Abstract: | This paper develops a Hall-Sandpile model of economic instability that combines a Hall-like transversal stress mechanism with sandpile threshold dynamics on a real production-network substrate. In analogy with the physical Hall effect, where exposed flows under an external field generate stress in a transversal direction, we model economic shocks as fields that act on flow-intensive, low-redundancy, low-capacity nodes and produce systemic stress through a multiplicative conversion function. The accumulated stress drives a discrete toppling rule and an avalanche dynamics whose effective activation threshold declines with transversal exposure. The model is calibrated on annual World Input--Output Database (WIOD) production networks for 2000--2014 and simulated on the 2014 substrate (2{, }283 country--sector nodes) under three alternative propagation normalisations to avoid mechanical near-criticality from row-stochastic operators. Controlled Monte Carlo experiments over external field intensity and redundancy stress generate four ordered regimes: stable absorption, latent fragility, critical transition, and avalanche regime. Mean avalanche size and the probabilities of finite-size systemic events $\Pr(S\!\geq\!5)$, $\Pr(S\!\geq\!10)$ and $\Pr(S\!\geq\!20)$ rise jointly with field intensity and redundancy stress. Tail diagnostics show regime-dependent thickening of the avalanche distribution, but the estimated tail indices remain too high to interpret as evidence of universal power-law criticality. The contribution is therefore a finite-size, real-network description of how transversal stress activates structural fragility, not a claim of self-organised criticality in the global economy. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2605.01561 |
| By: | Marlies Humpelstetter; Fanny Dellinger; Jozef Vasak; Charlotte Raab; Susanna Ulinski,; Miriam Franzelin; Luis Pedauga; Valeria Ferreira; Jose Manuel Rueda Cantuche |
| Abstract: | The Recovery and Resilience Facility (RRF) is estimated to increase Austria’s GDP by EUR 9.3 billion, more than double the size of its national funding allocation. This means that almost 60% of the RRF’s added value to Austria is generated by investments made in other Member States, through so-called spillover effects. These amounts only factor in the impact of RRF investments. The impact of RRF reforms – more difficult to assess at this point - comes on top. This paper conducts an in-depth analysis of the economic impact of the RRF in Austria. It also includes a case study that shows how RRF-supported reforms and investments contribute to the advancement of EU and national decarbonisation objectives. To assess the economic impact of the RRF, it distinguishes between direct impacts that arise from increased domestic spending and spillover effects that are generated by RRF investments abroad. This paper finds that thanks to its deep integration in the single market and strong innovation performance, Austria is among the main beneficiaries of RRF spillovers in the EU. In particular, Austria’s manufacturing and wholesale trade sectors receive a significant boost from the increased spending of other Member States. These findings further underline the added value of a coordinated, EU-wide investment programme and show that the impact of the RRF is far greater than the sum of all national investment plans. |
| JEL: | E65 E61 F15 F17 F41 F42 F62 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:euf:dispap:242 |