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on Open Economy Macroeconomics |
| By: | Paul Bergin; Woo Jin Choi; Ju H. Pyun |
| Abstract: | Macroeconomics tends to view exchange rate movements as transitory. However, persistent exchange rate realignments and the associated capital flows can have long-run implications for structural change and productivity growth. We provide empirical evidence that policies of reserve accumulation and currency undervaluation have had significant effects on manufacturing productivity, as well as on manufacturing share, product varieties, and domestic orientation of production chains. We develop a dynamic two-country model with two sectors, firm dynamics, and trade hysteresis to demonstrate a novel mechanism by which exchange rate policy reorients global supply chains and industrial structure. The model identifies conditions under which such a policy raises productivity and welfare in the home country. It also identifies conditions under which the policy leads to either permanent or reversible deindustrialization in a trading partner. Findings have implications for the long-run relationship between China and the U.S. |
| JEL: | E58 F31 F41 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35609 |
| By: | Thomas S. Gundersen; Ewoud Quaghebeur; Håkon Tretvoll (Statistics Norway) |
| Abstract: | Commodity price shocks can be a key driver of business cycles in resource-rich small open economies. We assess their importance for the Norwegian economy by estimating a structural VAR model and measuring the contribution of oil price shocks to fluctuations in economic activity. Focusing on the oil price collapse of 2014–2016, the VAR evidence indicates sizable spillovers from oil prices to the non-resource economy. We develop and estimate a small open economy DSGE model with a resource extraction sector that demands both materials and investment goods from the rest of the economy. Investment adjustment costs in the oil sector generate gradual and persistent spillovers to mainland activity following oil price shocks. Hence, the model is consistent with the empirical responses obtained from the VAR. Applying the framework to the COVID-19 pandemic, we find that while pandemic-specific shocks dominated the contraction, oil price movements also contributed non-negligibly to the downturn. |
| Keywords: | business cycles; small open economy; commodity prices |
| JEL: | E32 F41 F44 Q43 |
| URL: | https://d.repec.org/n?u=RePEc:ssb:dispap:1039 |
| By: | Jongrim Ha; Haroon Mumtaz; Franz Ruch |
| Abstract: | We develop a new dynamic factor model with stochastic volatility to quantify inflation tail risk across a large cross section of countries. The framework accommodates unbalanced panels and mixed-frequency data, allowing estimation of the full predictive distribution of inflation for over 200 economies over 1971-2023. Inflation risk - defined as the probability that inflation exceeds 5 percent over a twelve-month horizon - declined during the Great Moderation but rose sharply following the COVID-19 pandemic, with the global probability surpassing 50 percent from early 2021 through 2023. Exploiting the joint predictive distribution of inflation and real activity, we document a brief surge in global stagflation risk in late 2021. While inflation risk responds to both structural demand and supply shocks, it tends to decline during monetary policy tightening cycles. Cross-country evidence further shows that economies with greater trade and financial openness, stronger monetary policy frameworks, and fixed exchange rate regimes face systematically lower inflation risk, while commodity-exporting countries exhibit higher tail exposures. Overall, the results under-score the importance of monitoring inflation risks alongside inflation forecasts and highlight the role of institutions in mitigating macroeconomic tail vulnerabilities. |
| Keywords: | monetary policy, risk, FAVAR, stochastic volatility |
| JEL: | C32 E44 E52 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-72 |
| By: | Francesco Ferrante; Andrea Prestipino; Andrea Raffo; Michael E. Waugh |
| Abstract: | U.S. tariff rates in 2025 rose to levels not seen since the Great Depression, yet imports increased. To account for the missing trade collapse, we develop an open-economy New Keynesian model with tariff heterogeneity, inventories, and shocks to investment that capture the AI-driven boom. The model matches the untargeted paths of imports, output, and inflation; we use it to decompose the effects of tariffs and the investment boom. Absent the investment boom, imports would have fallen by 10 percent and activity would have contracted by 0.7 percent. The effects of tariffs depend on which goods are tariffed: tariffs on consumption and intermediates act like shocks to supply; tariffs on capital goods act like shocks to demand. The concentration of the 2025 tariff increases on consumption goods and the relative sparing of capital goods limited the damage to output while amplifying the inflationary impulse. |
| JEL: | E12 E52 F13 F41 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35630 |
| By: | Shigeto Kitano (Research Institute for Economics and Business Administration, Kobe University, JAPAN; Fuculty of International Studies, Hiroshima City University, JAPAN) |
| Abstract: | Using a DSGE model, we examine the effects of financial repression policies on the Lao economy. Facing a high level of external debt, the Lao government is likely to rely increasingly on domestic financing, thereby creating incentives to use financial repression. We consider two types of financial repression policies: requiring domestic banks to increase their holdings of government bonds and repressing the government's interest payments through a tax on banks' returns on government bonds. Our numerical experiments show that both policies crowd out capital investment, reduce output, and ultimately worsen the government's primary balance. These results suggest that financial repression may worsen the government's fiscal condition despite its intended purpose of easing the fiscal burden. |
| Keywords: | Financial repression; Crowding out; Emerging economies; Laos; DSGE model |
| JEL: | E32 E44 G28 H63 O29 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:kob:dpaper:dp2026-24 |
| By: | J. Scott Davis; Lillian Derr |
| Abstract: | Government debt financed from domestic savings has a smaller effect on interest rates than government debt financed from foreign borrowing, and nations that are net international creditors can borrow more cheaply than net international debtors. These observations help explain massive government borrowing since 2008 while bond yields remained persistently low. |
| Keywords: | government debt; foreign borrowing; domestic savings; interest rates |
| Date: | 2026–08–11 |
| URL: | https://d.repec.org/n?u=RePEc:fip:d00001:103648 |
| By: | Amin Izadyar |
| Abstract: | I revisit the exchange rate disconnect puzzle, first documented by Meese and Rogoff (1983), using generative artificial intelligence (AI) to forecast currency returns based on economic fundamentals. Using ChatGPT and DeepSeek, I analyze a comprehensive dataset of economic data releases for major currency pairs and measure the fundamental strength of each currency. These AI-powered fundamentals exhibit significant cross-sectional predictive power. A simple trading strategy that goes long currencies with strong fundamentals and short currencies with weak fundamentals generates a Sharpe ratio exceeding 0.7 per annum. The excess returns of this strategy remain significant after controlling for traditional currency factors. To mitigate concerns of look-ahead bias, I run multiple exercises to ensure that predictability stems from AI reasoning rather than memorization. Finally, I explore the potential sources of predictability and find evidence that the Taylor rule framework, generally used by central banks to set interest rates, is a key mechanism connecting exchange rates to economic fundamentals. |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2608.00761 |
| By: | Cosimo Petracchi (DEF, University of Rome "Tor Vergata"); Luca Riva (Central Bank of Ireland, University College Dublin); Marco S. Petterson (Naples Federico II and CSEr) |
| Abstract: | This paper proposes a firm-level mechanism that explains why exchange-rate regimes are largely neutral with respect to real macro variables: exporters actively adjust marginal costs and markups to absorb nominal exchange-rate fluctuations. Me quantify this mechanism using micro-level data from the European car market (1970–99). Me show that floating regimes are associated with limited adjustment in destination-currency prices and limited response in quantities sold. Me then estimate a structural demand-and-supply system to recover product-level markups and marginal costs. At breaks from pegged to floating regimes, producer-currency markups (marginal costs) fall on impact by around 11% (10%). A two-country real business cycle model with segmented financial markets, incorporating pricing-to-market and operational hedging, rationalises these patterns. Our model underscores the role of real micro rigidities, rather than nominal rigidities, in the weak transmission of exchange-rate fluctuations to real macro variables |
| Keywords: | European car market, exchange-rate regimes, demand estimation, pricing-to-market, variable markups, real rigidities |
| JEL: | D22 R31 R41 L11 L62 N14 |
| Date: | 2026–08–06 |
| URL: | https://d.repec.org/n?u=RePEc:rtv:ceisrp:627 |
| By: | Zixuan Huang; Mr. Aki Yokoyama |
| Abstract: | This paper analyzes a global map of dollar exposures and examines the relationship between net dollar exposures, defined as the difference between dollar assets and liabilities, and covered interest parity (CIP) deviations. We find that the cross-sectional relationship is significantly negative in advanced economies but positive in emerging markets. CIP deviations represent the hedging cost that foreign holders of dollar assets or liabilities incur to manage exchange rate risk. To explain, we develop a model in which the CIP deviations are determined by the demand and the supply side of hedging. The negative correlation in advanced economies can be explained by the variations in hedging demand. Larger net dollar exposures increase the hedging demand, raising hedging costs (reflected as more negative CIP deviations) and producing a negative correlation. In contrast, the positive correlation in emerging markets is explained by the supply side of the hedging market. Limited hedging supply leads to wider CIP deviations (more negative), encouraging firms to borrow in U.S. dollars rather than local currencies, thereby reducing net dollar exposures and generating a positive correlation. |
| Keywords: | Dollar assets; dollar liabilities; banks and non-banks; covered interest parity |
| Date: | 2026–08–14 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/169 |
| By: | Marcin Pietrzak |
| Keywords: | Geopolitical risk; financial tightening; risk-off pricing; block-exogenous BVAR; heterogeneous transmission |
| JEL: | C32 E44 F51 G12 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:cxu:wpaper:63 |
| By: | Ignacio Moreira Lara; Jan Pr\"user; Christoph Hanck |
| Abstract: | Understanding how macroeconomic shocks propagate across countries requires structural models that can jointly identify country-specific shocks and their international transmission. Yet extending structural vector autoregressions (SVARs) to large multi-country systems is challenging due to rapidly increasing dimensionality, computational costs, and the proliferation of identifying restrictions. This paper develops a Bayesian Structural Matrix Autoregression (BSMAR) framework that exploits the natural matrix structure of international macroeconomic data. By separating dependence across economic variables from dependence across countries, the framework provides a parsimonious representation that substantially reduces the dimensionality of large structural systems. We develop a Bayesian sampling algorithm for posterior inference that accommodates zero, sign, and ranking (magnitude) restrictions, allowing established SVAR identification schemes to be combined with a novel approach to identifying contemporaneous international spillovers. Applying the model to quarterly data for 15 economies, we find substantial heterogeneity in international shock transmission, with demand shocks playing a more prominent role than supply shocks in generating cross-country spillovers. |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2608.00262 |
| By: | Christian Lessmann; Zhixiao Yao |
| Abstract: | This paper studies whether access to the International Organization for Standardization (ISO) increases trade and through which margin. Using newly constructed ISO access data in a domestic-inclusive structural gravity framework for 185 trading partners from 1980 to 2016, the paper shows that ISO access increases international trade relative to domestic trade. Trade involving one ISO access country is about 63 percent higher than trade between countries without ISO access, while trade between two ISO access countries is about 95 percent higher. The effects are more visible for less developed countries and are stronger when the ISO access country is the exporter. Evidence on ISO certification uptake is consistent with an exporter-side standardization and certification-capacity channel. The paper identifies ISO access as an upstream quality infrastructure channel of trade. The findings imply that standardization and certification capacity can help countries overcome non-tariff barriers and upgrade exports. |
| Keywords: | ISO access, gravity, international trade |
| JEL: | F13 F14 F53 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12923 |
| By: | Philippe Andrade; Alexander Dietrich; John Leer; Jenny Tang; Egon Zakrajšek |
| Abstract: | Do firms adjust prices to realized costs, expected costs, or both? We address this question using a new survey of U.S. businesses that separately measures realized cost changes since the last price adjustment and expected cost changes over the subsequent year, including portions attributable to 2025 trade policies. Using perceived tariff exposure as an instrument, we identify the causal effects of realized and expected costs on prices. Reset prices incorporate almost 70 percent of current costs and nearly 45 percent of expected costs over the next year. The importance of these channels varies significantly across firms. Frequent price adjusters respond mainly to current costs, while sticky-price firms weight expectations more heavily. Goods producers adjust contemporaneously, whereas service firms are more forward looking, as are firms with a high labor share or facing high trade uncertainty. This evidence favors endogenous pricing frameworks in which uncertainty reshapes the reset-price kernel across horizons or imperfect-information models in which uncertainty amplifies the role of expectations over standard time-dependent models. |
| Keywords: | survey; small and medium-sized enterprises; Price setting; realized cost; pass-through; expected cost |
| JEL: | E31 C26 F14 |
| Date: | 2026–07–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedbwp:103642 |
| By: | Lorenzo Ductor Gómez; Danilo Leiva-León; Javier Adrián López Artero |
| Abstract: | Amid heightened policy uncertainty, understanding the drivers of global macroeconomic instability becomes increasingly critical. This paper studies the determinants of output volatility synchronization using data for 42 economies worldwide. We construct a bilateral time-varying index of volatility synchronization and infer its drivers using Bayesian model averaging, complemented by weighted average least squares (WALS) and least absolute shrinkage and selection operator (LASSO) regression. We find that differences in total factor productivity, interest rate, and fiscal policy volatility robustly explain cross-country synchronization, with nuances between developed and developing countries. Overall, the results highlight the role of technological divergence and macroeconomic policy uncertainty in shaping the international co-movement of output volatility. |
| Keywords: | macroeconomic volatility; Bayesian model averaging; total factor productivity; interest rate volatility; output volatility |
| JEL: | C23 E32 F44 |
| Date: | 2026–07–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedbwp:103627 |