|
on Open Economy Macroeconomics |
| By: | Fukui, Masao; Nakamura, Emi; Steinsson, Jón |
| Abstract: | Abstract We study the consequences of “regime-induced” exchange rate depreciations by comparing outcomes for peggers versus floaters to the U.S. dollar in response to a dollar depreciation. Pegger currencies depreciate relative to floater currencies and these depreciations are strongly expansionary. The boom is associated with a fall in net exports, and (if anything) an increase in interest rates in the pegger countries. This suggests that expenditure switching and domestic monetary policy are not the main drivers of the boom. We show that a large class of existing models cannot match our estimated responses and develop a model with imperfect financial openness that can. Following a depreciation, uncovered interest parity deviations lower the costs of borrowing from abroad and stimulate the economy, as in the data. The model is consistent with (unconditional) exchange rate disconnect and the Mussa fact, even though exchange rates have large effects on the economy. |
| Keywords: | 38 Economics (for-2020), 3801 Applied Economics (for-2020), 3802 Econometrics (for-2020), 3803 Economic Theory (for-2020), 14 Economics (for), Economics (science-metrix), 3801 Applied economics (for-2020), 3802 Econometrics (for-2020), 3803 Economic theory (for-2020) |
| Date: | 2025–10–11 |
| URL: | https://d.repec.org/n?u=RePEc:cdl:econwp:qt5wq6v1rf |
| By: | Bolivar, Carlos; Dueñas, Federico; Valencia, Oscar |
| Abstract: | This paper studies how sovereign default risk shapes public investment in climate adaptation. We build a sovereign default model in which governments invest in adaptation to reduce disaster damages. Sovereign risk depresses adaptation through two mechanisms: higher borrowing costs and debt overhang under long-term debt. These effects generate feedback between risk and disaster exposure. Using a new panel of adaptation spending from budget records, we show that after catastrophic disasters spreads rise where prior adaptation was low, and that losses are smaller where adaptation budgets recently increased. In our calibration, adaptation yields the largest welfare gains near the default boundary, where financing is tightest. |
| JEL: | F41 F34 H63 Q54 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:14759 |
| By: | Michael D Bordo (Rutgers University and NBER); Cecile Bastidon (U. Toulon & CAC-IXXI Complex Systems Institute, Lyon, and OFCE-Sciences Po, Paris) |
| Abstract: | We propose stress tests based on an original International Monetary System (IMS) model with regime switchings. The model is calibrated for nine reference currencies from the beginning of the Classical Gold Standard to the present. Regime switchings in currency dominance are related to combinations of conditions on a multidimensional environment variable that includes five classes of shocks: technology; development; monetary, financial and fiscal institutions; democracy and conflicts; and the regulatory environment. We provide an original database of events for these five classes of shocks, which is used for calibration. The calibration highlights the important role of the democracy and conflicts component in regime switchings. The calibrated model is then used to perform stress tests on the current prospects of currency dominance for a broad set of scenarios. A salient result from the scenarios we tested is that the dominance of the US dollar is at most marginally affected. No other currency emerges as a major player, suggesting strong inertia in the system’s current centripetal dynamics. |
| Keywords: | International monetary system; Currency dominance; Democracy; Conflicts; Geopolitics; Monetary and financial graphs; Non-linear modeling; Conditional Markov chains |
| JEL: | C3 C82 E42 F33 G15 N2 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:pri:cepsud:355 |
| By: | Gordon Y. Liao; Eswar S. Prasad; Tony Zhang |
| Abstract: | We show that the dollar remains dominant in most aspects of global finance. The euro and renminbi are competing in an increasingly fragmented second tier of currencies, leaving no clear rivals to the dollar. We study how financial innovation could reshape the international monetary system. In principle, innovation levels the playing field between countries, for instance by reducing the need for vehicle currencies to intermediate transactions between other currency pairs and by making it easier to acquire and trade foreign assets. We show that an alternative outcome is more likely. Innovations that reduce frictions in cross-border transactions, especially dollar-backed payment stablecoins and other forms of tokenization of money, could interact with relative market thickness to reinforce the dollar’s dominance. This outcome is not preordained but depends on other countries’ willingness to embrace innovations and strengthen their financial markets and regulatory frameworks. While unipolarity has many disadvantages, we show that in some circumstances multipolarity might result in greater global fragility at times of financial market stress. |
| JEL: | E42 E51 F33 F36 G15 G33 O33 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35822 |
| By: | Tatjana Dahlhaus (Bank of Canada); Madan Ghosh (Carleton University); Yena Joo (Bank of Canada); Stephen Murchison (Bank of Canada); Genevieve Nelson (Bank of England); Rachit Lumb (Bank of Canada); Jonathan Swarbrick (University of St Andrews); Alexander Ueberfeldt (Bank of Canada); Raven Wheesk (Bank of Canada); Yinxi Xie (Indiana University, Bloomington); Yang Zhang (Bank of Canada) |
| Abstract: | Climate change presents significant macroeconomic challenges, particularly for small open economies deeply integrated into global trade and energy markets. Focusing on Canada, we analyze the macroeconomic implications of the transition to a low-carbon economy, paying attention to global and domestic spillovers. On the domestic side, we introduce Energy-ToTEM (E-ToTEM), an extension of the Bank of Canada’s Terms-of-Trade Economic Model (ToTEM), which captures energy sector dynamics, substitution effects, and policy interactions. To account for international forces, we use a global, multi-sector, multi-region general equilibrium model, allowing us to assess international climate policy transmission and global demand implications for Canada. Our results indicate that, under the net-zero scenario, global carbon prices rise persistently through 2050. By 2050, world gross domestic product (GDP) is about 8% lower and Canadian GDP about 7% lower relative to a no-policy benchmark, while inflation rises modestly under the historical monetary policy rule. Monetary policy faces a clear trade-off: strict inflation targeting would deepen the Canadian output loss to about 7.5%, whereas a more accommodative stance would limit it to around 5.5%, at the cost of inflation about 1 percentage point above target. Overall, our findings highlight the importance of accounting for both global spillovers and monetary policy when evaluating the macroeconomic consequences of the transition to net zero. |
| Keywords: | macroeconomic simulations; transition to net-zero; climate policies; scenario analysis |
| JEL: | E27 E52 Q43 Q58 |
| Date: | 2026–09–29 |
| URL: | https://d.repec.org/n?u=RePEc:san:econdp:2604 |
| By: | Nora Paulus (DF, Université du Luxembourg); Giuseppe Pulina (DEM, Université du Luxembourg); Patrice Pieretti (DEM, Université du Luxembourg); Benteng Zou (DEM, Université du Luxembourg) |
| Abstract: | "We analyze how lower barriers to labor mobility affect tax competition, labor allocation, wages, public revenues, and welfare in a two-country model. Govern- ments compete for mobile workers through labor income taxation, and national welfare is evaluated on a residence basis, including the mobility burden borne by migrants. Greater mobility intensifies tax competition, raises workers’ net wages in both countries, and reallocates labor and output toward the advanced economy. As a result, global welfare rises, while national welfare increases in the advanced coun- try and decreases in the lagging country. Because the advanced country’s welfare gain exceeds the lagging country’s welfare loss, there is sufficient aggregate welfare to make both countries better off through compensation. This possibility does not, however, imply that such a transfer is fiscally feasible. Since mobility reduces tax revenues in both countries, the required compensation cannot be financed from additional fiscal resources generated by liberalization. Labor-market integration is therefore welfare-feasible but not fiscally self-financing. Its implementation thus requires broader fiscal coordination or external funding." |
| Keywords: | "international labor mobility; tax competition; national welfare; compensating transfers; fiscal coordination." |
| JEL: | F22 H54 H87 J61 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:luc:wpaper:26-13 |
| By: | Colin J. Hottman; Ricardo M. Reyes-Heroles |
| Abstract: | We study how international trade has affected U.S. inflation dynamics. We develop a multi-region New Keynesian model of an open monetary union in which regional Phillips curve slopes depend on exposure to imported goods. Guided by the model, we construct state-level measures of import penetration in final consumption and exploit cross-state variation to estimate regional Phillips curves over 1976-2017. Greater import exposure leads to significantly flatter state-level Phillips curves. We estimate that rising import exposure accounts for roughly 40 percent of the flattening of the U.S. Phillips curve over this period. Increased import exposure also shifted the U.S. Phillips curve downward, reducing inflation by about 0.17 percentage point annually between 1976 and 2008. A reversal of globalization to early-1990s levels would substantially alter monetary policy trade-offs, reducing the sacrifice ratio by almost one-half. Our findings show that international trade has played a quantitatively important role in shaping U.S. inflation dynamics. |
| Keywords: | globalization; inflation; Phillips curve; international economics |
| JEL: | E10 E30 F00 F40 F60 |
| Date: | 2026–09–22 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:103848 |
| By: | Francesco Filippucci; Peter Gal; Katharina Laengle; Matthias Schief; Muhammed A. Yildirim (Center for International Development at Harvard University) |
| Abstract: | This paper provides estimates of expected per capita real income gains from AI over the next decade in OECD and G20 economies. It relies on a multi-country, multi-sector general equilibrium model to incorporate the role of international trade and considers different scenarios regarding AI adoption paths and AI capabilities. In our central scenario, AI-driven productivity gains vary widely across countries and are expected to raise per capita real income growth by 0.1–0.95 percentage points annually. The model’s dynamics reveal a key insight: while countries lagging in AI adoption can gain from cheaper, AI-intensive imports generated by global diffusion, maintaining competitiveness – especially in highly AI-exposed sectors – ultimately requires strong domestic AI adoption. As a further channel, the paper quantifies the welfare effects generated by international knowledge spillovers boosting AI adoption of countries with relatively lower AI adoption. |
| Keywords: | Artificial Intelligence, International trade, Productivity, Technology adoption |
| JEL: | C6 E1 F1 O3 O4 O5 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:glh:wpfacu:272 |
| By: | Harun Alp; Sina T. Ates; Colin C. Caines; Nathan Converse; Jasper Hoek; Eva Van Leemput |
| Abstract: | Global imbalances have returned to the forefront of policy debates, with China at the center of those discussions. China's trade surplus has reached exceptionally large levels, raising concerns about its implications for the rest of the world (de Soyres et al. 2026). |
| Date: | 2026–09–22 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:103839 |
| By: | Fernando E. Alvarez; David Argente; Alberto Cavallo; Francesco Lippi |
| Abstract: | We use the euro cash changeover, a large-scale and purely nominal reform that requires all firms to redenominate posted prices, to distinguish among theories of price rigidity. We develop a nonstationary menu-cost model in which firms anticipate the changeover date and may combine currency adoption with real price adjustment. The announcement makes the firm’s inaction region time-varying, a singular control problem with a moving boundary for which closed-form characterizations are rarely available. We solve this problem analytically by perturbation, recovering the whole path of the boundary, the date at which firms begin adopting the new currency, and the implied pricing moments. The model predicts that, as the changeover approaches, firms adjust more frequently but by smaller amounts, compressing the distribution of price changes. We test these predictions using historical CPI micro data from Austria, Finland, Greece, and Slovakia, a UK benchmark, and daily price data from the recent changeovers in Croatia and Bulgaria. Across changeovers, adjustment frequency rises while the size and dispersion of price changes fall. The model adds a single parameter to the standard menu-cost setup, the cost of pricing in the wrong currency. Calibrating it to the observed rise in adjustment frequency, the model reproduces the decline in the size of price changes and its subsequent recovery, neither of which is targeted. The evidence supports state-dependent price-setting models over models in which nominal redenomination leaves real pricing behavior unchanged. |
| JEL: | D40 E31 E42 F33 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35790 |