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on Open Economy Macroeconomics |
| By: | Javier Bianchi; Louphou Coulibaly |
| Abstract: | What is the optimal monetary policy response to tariffs? This paper explores this question within an open-economy New Keynesian model and shows that the optimal monetary policy response is expansionary, with inflation rising above and beyond the direct effects of tariffs. This result holds regardless of whether tariffs apply to consumption goods or intermediate inputs, whether the shock is temporary or permanent, and whether tariffs address other distortions. |
| JEL: | E24 E44 E52 F13 F41 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33560 |
| By: | Horioka, Charles Yuji |
| Abstract: | The finding of Feldstein and Horioka (1980) that domestic saving and domestic investment are highly correlated across countries despite the rapid globalization and liberalization of financial markets in recent decades has been regarded as a Puzzle or Paradox. However, in this paper, we show that countries as a whole may not be able to transfer their capital abroad and that the Feldstein-Horioka Finding of domestic saving and domestic investment being highly correlated across countries may arise even if there are no frictions in financial markets and even if individual investors can freely transfer their capital abroad if there are frictions in goods markets such as transport costs, tariffs, nontariff barriers, the cost of regulatory compliance, etc. In fact, there is evidence that frictions in goods markets are a more serious impediment to countries as a whole being able to transfer their capital abroad than frictions in financial markets, especially in the short run. |
| Keywords: | Capital controls, fallacy of composition, Feldstein-Horioka Finding, Feldstein-Horioka Puzzle or Paradox, frictions in financial markets, frictions in goods markets, global interest rate, globalization and liberalization of financial markets, interest parity, interest rate equalization, international capital flows, international capital mobility, saving-investment correlations, saving retention coefficient, trade costs, trade frictions |
| JEL: | F15 F21 F32 F36 F41 G15 |
| Date: | 2024–01 |
| URL: | https://d.repec.org/n?u=RePEc:agi:wpaper:02000074 |
| By: | Yin-Wong Cheung (Department of Economics, University of California, Santa Cruz, CA 95064, USA); Wenhao Wang (School of Finance, Shandong University of Finance and Economics, China); Frank Westermann (Institute of Empirical Economic Research, Osnabrück University, D-49069 Osnabrück, Germany) |
| Abstract: | A modified dynamic model averaging framework, which allows for inferences regarding the shifting relevance and significance of explanatory variables, is employed to evaluate the in-sample performance of exchange rate models. This analysis is based on a set of 16, 384 model specifications derived from 14 canonical and newly introduced explanatory variables. Our findings indicate: (a) frequent changes in the model specification that best describes an exchange rate, (b) the relevance of individual explanatory variables is not stable over time and varies across exchange rates, with these variables exhibiting differential and sometimes opposing effects, and displaying non-uniform strengths across different exchange rates and periods, (c) the combination of economic and/or financial variables that enhances the empirical evidence of purchasing power parity (PPP) is specific to each exchange rate. These results underscore the challenges associated with employing a single exchange rate model or the scapegoat hypothesis to describe all exchange rates across all time periods. |
| Keywords: | Bayesian Dynamic Model Averaging; Explaining Exchange Rates; In-Sample Performance; Purchasing Power Parity Deviations |
| JEL: | C11 F31 |
| Date: | 2025–04–29 |
| URL: | https://d.repec.org/n?u=RePEc:iee:wpaper:wp0125 |
| By: | Botero-Ramírez, Oscar David; Murcia, Andrés; Villamizar-Villegas, Mauricio |
| Abstract: | We examine the impact of foreign investor heterogeneity on local lending, focusing on Colombia from 2014 to 2023. Distinguishing between benchmark-driven and unconstrained investors, we highlight their differing responses to global and idiosyncratic shocks. Using bond-level data and the corporate credit registry, we link banks’ exposure to foreign flows with firm-level lending decisions. By decomposing Colombia’s weight in the J.P. Morgan GBI-EM index into valuation and exogenous components, we identify how investor behavior shapes bank balance sheets. Our main findings show that banks with greater exposure to unconstrained investors significantly expand lending during capital inflows, whereas those linked to benchmark-driven investors exhibit a more muted response. These results emphasize the role of investor composition in financial stability and provide key insights for policymakers in emerging markets. |
| Keywords: | Capital flows, Foreign investment, Investor classification, J.P. Morgan GBI-EM index, Emerging markets |
| JEL: | F3 F4 G01 G11 G12 G15 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:rie:riecdt:112 |
| By: | Adrien Auclert; Matthew Rognlie; Ludwig Straub |
| Abstract: | We study the short-run effects of import tariffs on GDP and the trade balance in an open-economy New Keynesian model with intermediate input trade. We find that temporary tariffs cause a recession whenever the import elasticity is below an openness-weighted average of the export elasticity and the intertemporal substitution elasticity. We argue this condition is likely satisfied in practice because durable goods generate great scope for intertemporal substitution, and because it is easier to lose competitiveness on the global market than to substitute between home and foreign goods. Unilateral tariffs do tend to improve the trade balance, but when other countries retaliate the trade balance worsens and the recession deepens. Taking into account the recessionary effect of tariffs dramatically brings down the optimal unilateral tariff level derived in standard trade theory. |
| JEL: | E0 F10 F40 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33726 |
| By: | Zhengyang Jiang |
| Abstract: | China’s rising presence in international finance, which has long lagged behind its prominence in international trade, is now reshaping global financial dynamics. Using a large sample of developing countries, this paper documents that countries more reliant on China’s lending are less exposed to the global financial cycle in exchange rates, equity prices, bond yields, and capital flows. These countries were not less exposed before China became a major lender, and trade linkages to China do not explain these results. Since China lends primarily in dollar, the exposure reduction is not through the traditional channel of mitigating currency mismatch. These findings suggest that international lending plays a unique role in insulating developing countries from global shocks, and through this channel U.S. and Chinese policies interact to shape global financial outcomes. |
| JEL: | F34 F42 G15 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33519 |
| By: | Gianni De Fraja |
| Abstract: | The labour force in the university sector of many countries is extremely international. I propose a theoretical model to study cross border academic mobility, where academics bargain with institutions over pay and choose the countries where they live and work to maximise their lifetime utility. I then test the model on a sample of well over 900, 000 research active academics over 33 years. The model predicts how academics respond both to changes in external conditions, including exchange rate fluctuations, and to changes in their record, measured by their publications and their citations. The theoretical predictions are confirmed by the empirical analysis. |
| Keywords: | Academic migration, university, international academic mobility, research, higher education |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:not:notgep:2025-03 |
| By: | Maria Bas; Lionel Fontagné; Irene Iodice; Gianluca Orefice |
| Abstract: | This paper investigates the role played by firms' managerial skills in the heterogeneous reaction of exporters to common exogenous changes in their international competitiveness (here captured by changes in the real exchange rate). Relying on a simple theoretical framework, we show that firms with better managerial skills have higher profits, market power, and are able to adapt their markup more when faced with a competitiveness shock. We test this prediction relying on detailed firm-product-destination level export data from France for the period 1995-2007 matched with specific information on the firms' share of managers. Our findings show that managerial intensive firms have larger exporter price elasticity to real exchange rate variations. The effect is not trivial: in the wake of a depreciation, exporters whose management intensity is one standard deviation higher than the average, increase their prices by 51% to 73% more than the average exporter. This finding is robust to controlling for the alternative explanations suggested by the previous literature to explain the heterogeneous pass-through of firms. |
| Keywords: | Exchange Rate Pass-through;Heterogeneous Pricing-to-market;Managerial Skills |
| JEL: | F12 F14 F31 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:cii:cepidt:2025-04 |
| By: | Nuwat Nookhwun; Jettawat Pattararangrong; Phurichai Rungcharoenkitkul |
| Abstract: | Under dominant currency pricing, exchange rate swings affect firms’ profits in domestic currency rather than price competitiveness. We quantify these valuation effects by constructing firm-specific exchange rates that reflect invoicing currencies and capture cashflow exposures. These net-invoice-currency-weighted exchange rates (NICER) outperform trade-weighted exchange rates in explaining firm profitability, particularly for smaller exporters. Higher trade dependency amplifies NICER sensitivities, while financial hedging only partially mitigates them. NICER fluctuations also impact firm liquidity and credit conditions, with large exporters offsetting liquidity shocks through external financing. These cash-flow effects, in turn, drive exporters’ investment and employment decisions. |
| Keywords: | Exchange rates; Valuation effects; Dominant currency paradigm; Firm-level data; Firm profitability; Invoicing currency; Exports; Financial hedging |
| JEL: | E44 F31 F41 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:pui:dpaper:233 |
| By: | Brignone, Davide (Bank of England); Gambetti, Luca (Universitat Autònoma de Barcelona, BSE, Università di Torino and CCA); Ricci, Martino (European Central Bank) |
| Abstract: | In this paper, we investigate the economic effects of geopolitical risk (GPR) shocks, with a focus on non‑linear transmission mechanisms. Using a VARX framework, we show that larger positive shocks have a disproportionately greater impact, pointing to the existence of an amplification channel driven by rising uncertainty. Large GPR shocks trigger precautionary behaviours, leading to sharp declines in consumption and equity prices. In contrast, prices react positively but the responses are overall muted due to offsetting forces from reduced demand and heightened uncertainty. We further show that GPR shocks linked to anticipated geopolitical threats exhibit pronounced non‑linearities, significantly increasing oil prices and inflation expectations, thereby exerting upward pressure on domestic prices. |
| Keywords: | Geopolitical risk; non-linearities; inflation; vector autoregressions; uncertainty |
| JEL: | C30 D80 E32 F44 H56 |
| Date: | 2025–02–21 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1118 |
| By: | Takagi, Shinji |
| Abstract: | The paper uses the panel data methodology to reassess the scholarly consensus in the economic history literature ("silver-standard myth") that attributes Japan's export boom of the late nineteenth century to the country's fortuitous adoption of the silver standard. The paper, based on the annual panel data of Japanese trade flows with five gold- and five silver-standard countries for 1885-97, finds that the growth of exports was consistently higher for silver- than for gold-standard destinations (though the difference was statistically not significant), refuting the near-consensus view that the falling relative price of silver stimulated exports to gold-standard countries. This finding should be both logical and intuitive. First, given the higher rate of inflation in Japan, the yen's real exchange rate did not depreciate during the silver-standard era. Second, Japan, as a small open economy, was a price-taker in world markets. The expansion of Japanese exports can best be understood as resulting from Japan's increased capacity to produce goods, a surplus of which the country was able to sell at given world prices. |
| Keywords: | silver standard, Japan and the silver standard, early industrialization in Japan, impact of the silver standard on Japanese trade |
| JEL: | F33 E42 N15 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:agi:wpaper:02000146 |
| By: | Thiago Revil T. Ferreira; Mitch Lott; Keith Richards |
| Abstract: | In this note, we provide updated real-time estimates for global longer-run real neutral interest rates – the real component of policy interest rates consistent with both economic activity and inflation at their longer-run trends. We use the methods from Davin and Ferreira (2022) and Ferreira and Shousha (2023) for the same variety of economies. |
| Date: | 2025–04–09 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2025-04-09 |