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on Open Economy Macroeconomics |
| By: | Emmanuel Farhi (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, IAST - Institute for Advanced Study in Toulouse); Jean Tirole (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, IAST - Institute for Advanced Study in Toulouse) |
| Abstract: | Authorities' support policies shape the location and continuation of industrial and banking activity on their soil. Firms' locus of activity depends on their prospect of receiving financial assistance in distress and therefore on factors such as countries' relative resilience. We predict that global firms are global in life and national in death; and that they become less global when competition is more intense, times are turbulent, and international risk sharing (say, through swap lines) weak. We analyse the competitive benefits of industrial and banking policies as well as their limitations, such as currency appreciation. |
| Keywords: | Exhorbitant duty, Hegemon, Economic geography, National champions, Cross-border banking, Liquidity support, Too domestic to fail, Home bias |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04906462 |
| By: | Stefan Niemann (University of Konstanz); Timm M. Prein (University of Helsinki Graduate School of Economics) |
| Abstract: | This paper studies the consequences of overreaction to news in the context of a quantitative model of sovereign debt and default. Overreaction is formalized in terms of diagnostic expectations that excessively extrapolate from current condi-tions. Examining historical IMF growth forecasts, we find empirical evidence for this behavior and incorporate it into an otherwise standard model of long-term sovereign debt. The model successfully matches salient business cycle statistics, including the distribution of sovereign spreads, and also predicts an empirically plausible default frequency. Counterfactual experiments indicate that diagnostic expectations induce sizeable welfare losses, the bulk of which could be eliminated under rational behavior of the sovereign borrower. Fiscal rules, which restrict bor-rower behavior via limits on admissible levels of debt or spreads, can therefore be used in a welfare-enhancing way. Although spread-brake rules may be subject to distortions from diagnostic market sentiment, they o˙er robustness and generally perform better than debt-brake rules. |
| Keywords: | sovereign debt; diagnostic expectations; fiscal rules |
| JEL: | E44 E62 F34 H63 |
| Date: | 2025–02–04 |
| URL: | https://d.repec.org/n?u=RePEc:knz:dpteco:2502 |
| By: | Douglas A. Irwin |
| Abstract: | In July 1991, India began to dismantle its long-standing, highly restrictive import control regime and move toward a more open economy. How were policymakers able to dislodge and replace an entrenched system with powerful vested interests behind it? Standard reasons for policy change—pressure from domestic producer interests, shifts in political power, or conditionality by international financial institutions—fail to explain why the shift in trade policy took place. Instead, reform-minded technocrats persuaded political leaders to reject what had been a standard response to balance of payments pressure (import repression to avoid a devaluation) and embrace a new approach (exchange rate adjustment and a reduction of import restrictions). This paper explores the economic and political context behind the country’s dramatic policy transformation. India’s experience highlights the crucial link between exchange rate policy and trade policy. |
| JEL: | F13 F31 N75 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33420 |
| By: | Mohr, Cathrin; Trebesch, Christoph |
| Abstract: | We review the literature on geoeconomics, defined as the field of study that links economics and geopolitics (power rivalry). We describe what geoeconomics is and which questions it addresses, focusing on five main subfields. First, the use of geoeconomic policy tools such as sanctions and embargoes. Second, the geopolitics of international trade, especially work on coercion and fragmentation. Third, research on the geopolitics of international finance, which focuses on currency dominance and state-directed capital flows. Fourth, the literature on geopolitical risk and its spillovers to the domestic economy, e.g. on investments, credit, and inflation. Fifth, the economics of war, in particular research on trade and war and on military production. As geopolitical tensions grow, we expect the field to grow substantially in the coming years. |
| Keywords: | Geoeconomics, geopolitics, political economy, power, trade, international finance, war, sanctions, coercion |
| JEL: | F01 P45 D74 H56 N40 F1 F2 F3 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ifwkwp:310330 |
| By: | António Afonso; José Alves; José Carlos Coelho; Jamel Saadaoui |
| Abstract: | We implement a two-step analysis of fiscal and external causality patterns using a data set covering the 27 EU countries in the period 2002Q1-2023Q4. In the 1st step, we compute fiscal and external sustainability time-varying coefficients, modelling the cointegration relationship between government revenues and government spending, and between exports and imports. In the 2nd step, we use three recursive strategies, combined with Granger causality tests: forward expanding, rolling, and recursive window methods to capture causal relationships. Our results show that: (i) peripheral countries have lower sustainability coefficients, while non-Eurozone countries have higher sustainability coefficients, (ii) after the 2008 global financial crisis, there was an improvement in fiscal and external sustainability for most countries, (iii) during the Eurozone crisis in 2010-2012, in Austria, France, Greece, Ireland, Netherlands, Slovakia and Spain, there was causality between fiscal and external sustainability, (iv) during that period, causality was observed between the external and fiscal sustainability in EMU countries (Austria, Germany, Malta, Netherlands, Slovakia, Slovenia, Spain) and in non-EMU countries. |
| Keywords: | fiscal sustainability; external sustainability; European Union; time-varying causality; lag-augmented vector autoregression. |
| JEL: | C22 C23 F32 F41 H30 H62 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:ise:remwps:wp03692025 |
| By: | Dominy, Jonas; Gräbner-Radkowitsch, Claudius; Heimberger, Philipp; Kapeller, Jakob |
| Abstract: | This paper analyzes developmental trajectories in the EU. In doing so, it diagnoses economic polarization on two different levels: for one, we observe a divergence of average incomes across EU countries as a persistent empirical feature associated with European integration. For another, European economic integration in general and the introduction of the Euro in particular are associated with the emergence of heterogeneous developmental trajectories, which build on, and intensify differences in technological capabilities, institutional and legal setups, as well as labor market characteristics. When clustering countries with reference to similarities in terms of macroeconomic and institutional characteristics across countries, we find evidence for the existence of four distinct development models: core, periphery, and workbench economies, as well as financial hubs. Each of these groups is defined by distinct technological, institutional, and macroeconomic characteristics. Our findings point to suitable ways for extending and refining existing typological approaches, such as the Varieties of Capitalism or the growth model approach, thereby allowing us to better account for the heterogeneity of developmental pathways emerging in the course of an intensifying European race for the best location. |
| Keywords: | Economic polarization, European integration, Development models, growth models, European Union |
| JEL: | B5 F6 F45 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ifsowp:311852 |
| By: | McLaughlin, Darragh; McLaughlin, Eoin; Kenny, Sean |
| Abstract: | The 1955-56 macroeconomic crisis is a central event in modern Irish history. Yet, despite this centrality, its causes are not clearly understood. In 1955-6, Ireland, which had previously followed British interest rates in lockstep as part of its fixed exchange with the latter, briefly experimented with independent monetary policy. Our contribution is twofold. First, we highlight how the Irish response was based on a misunderstanding of a run on Sterling in 1955. Second, we focus on a series of monetary shocks taking place from January 1955 to February 1956. We construct yields for Irish and UK public debt, as well as bank share indices at a daily frequency (1954-6), to test whether the shock was transmitted via financial markets. Employing an event study and testing for structural breaks, we explore the institutional framework through which the mechanisms of the crisis occurred. We find that expansionary monetary policy can only be maintained with sufficient reserves, merely postponing the inevitability of capital flight which is observed in the banking sector. |
| Keywords: | Monetary Policy, Monetary Union, Optimum Currency Area, Trilemma |
| JEL: | E42 E52 F45 N14 N24 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:qucehw:311196 |
| By: | Guillaume Bazot (LED - Laboratoire d'Economie Dionysien - UP8 - Université Paris 8 Vincennes-Saint-Denis); Eric Monnet (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CEPR - Center for Economic Policy Research); Matthias Morys (University of York [York, UK]) |
| Abstract: | We study how central banks have used their balance sheet to absorb international monetary shocks since the late 19th century, thereby regaining some monetary policy autonomy in a context of financial openness. If the uncovered interest rate parity does not hold, an increase in the leading international interest rate may push up domestic interest rates in both fixed and floating exchange rate regimes. Central banks can partially insulate domestic short-term interest rates from this increase by expanding domestic assets. With a fixed exchange rate, this is in addition to the sterilization of foreign exchange interventions. Accounting for the response of central bank balance sheets to an exogenous international shock sheds light on some puzzling behavior of interest rates and exchange rates across international monetary regimes in history. This study is based on a new monthly dataset of central bank balance sheets, macroeconomic, and financial variables for 23 countries since 1891. |
| Keywords: | Trilemma, Central bank balance sheets, International monetary system, Dilemma, Global financial cycle, Foreign exchange interventions trilemma |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:hal:psewpa:halshs-04778323 |