After decades of decline in natural interest rates, a key question is whether the low- r^* era is ending. We estimate natural rates for 16 advanced economies since the 1870s using the Laubach and Williams approach, providing the longest and broadest set of comparable r^* estimates to date. We show that r^* differs substantially from observed real interest rates—a disconnect with implications for policy. Population aging and productivity growth are the determinants most robustly associated with r^* , while inequality and the relative price of capital are not. Higher public debt-to-GDP ratios are associated with lower natural rates. These relationships vary over time, cautioning against mechanical extrapolation. Our decomposition reveals that the demographic headwinds facing advanced economies are unprecedented in our 150-year sample, suggesting that a sustained reversal of the decline is far from assured—even if the green transition or artificial intelligence eventually raise productivity growth.
The Dominant Currency Paradigm is widely acknowledged, and it is well known that the U.S. dollar (USD) plays a key role in Japan’s trade. We present new evidence showing that small Japanese firms prefer invoicing exports in the Japanese yen (JPY), while large Japanese firms—only the top 10 percent by firm size—tend to invoice exports more often in USD than in JPY, based on Japan Customs export declaration data. Using fixed-effect panel estimation and the most comprehensive Japanese firm-level survey data, we demonstrate that intra-firm and arm’s-length export transactions are invoiced differently. Specifically, parent companies in a multinational corporate group tend to invoice their exports to overseas subsidiaries in USD to insulate them from exchange rate risk and to centralize the group-wide foreign exchange management through operational hedging that offsets USD-denominated import payments with export revenues within the group. Smaller firms with fewer overseas subsidiaries are likely to continue opting for JPY-invoiced exports because of their limited capacity for financial hedging.
Large stocks of public and external debt tempt policymakers to extract resources from their creditors. This article characterizes three broad forms of financial repression that serve this purpose. The first consists of direct taxation of the financial sector through levies on financial transactions, banks’ income, or pension-fund assets. The second is a sudden and sufficiently persistent devaluation of the currency. The third raises the demand for the non-monetary services provided by different types of government liabilities while keeping their supply scarce, thereby creating yield discounts. Reviewing historical experience, including recent years, the article concludes that each of the three often fails to deliver sustained revenues, even if they can sometimes be temporarily large. Financial repression is an alluring temptation with illusory gains: yielding to it may generate substantial efficiency losses and produce only limited revenue.
Do the effects of local fiscal multipliers vary based on the type of government purchases? We find that government purchases of services generate larger increases in local employment, labor income, and output than purchases of goods. This variation stems from key factors: differences in sectoral characteristics—particularly centrality and markups—between good-producing and service-producing industries, and distinct impacts on business turnover and productivity. Service purchases generate larger aggregate productivity gains than goods purchases because firm turnover is concentrated in high-growth sectors, suggesting that extensive-margin reallocation and productivity improvements amplify fiscal responses more strongly for services. Our results highlight that fiscal policy effectiveness depends not only on scale but also on the composition of spending, with important implications for the design of government purchase programs.
The effective rate of protection (ERP)—a widely used tool for evaluating the net impact of input and output tariffs on individual sectors—rests on theoretical foundations that predate the rise of global value chains. In this paper, we develop an updated ERP for policy analysts, with two core elements. First, we introduce a new ERP concept that measures how tariffs shift derived demand for real value added at the sector level; it has an intuitive interpretation as the effective subsidy to buyers of sectoral value added that replicates the demand effects of the tariff structure. Second, we demonstrate how to compute this index accounting for global value chain linkages. The result is an ERP for the GVC age, in which effective protection depends on the structure of value chains across countries and sectors, and the structure of all tariffs applied globally. Applying the framework, we analyze how United States tariff changes in 2025 altered effective protection in the United States and abroad.
Digital payment platforms can displace cash and extend financial services to underserved populations, yet many adults worldwide remain unbanked. Leveraging granular microdata on individual transactions and user characteristics, we argue that broad cash substitution via peer-to-peer (P2P) platforms depends on a “rapid low-income gradient”—the speed at which adoption spreads from affluent early users to lower-income groups. In three Latin American cases—Brazil’s Pix, Costa Rica’s Sinpe Móvil, and Mexico’s CoDi—we document that low adoption costs, strong network effects, coordinated supply-side integration, and early awareness efforts enabled Pix and Sinpe Móvil to reach nearly all income segments within five years, whereas CoDi remains characterized by low usage and predominantly high-income adopters.
This paper documents stylized facts about the “Great Reallocation” in US supply chain trade following the 2018–2019 tariff shocks and the April 2025 Liberation Day announcements. We find that: (i) The USA has decoupled from China but not from the world overall. (ii) US imports diversified mainly among its top 20 partners, rather than expanding to new source countries. (iii) Local linear projections confirm ongoing declines in China’s import shares, with compensating increases from Vietnam, Mexico, and Taiwan. (iv) Most of this shift occurred along the product-level intensive margin, though extensive margin adjustments became more pronounced for Vietnam and India from 2021 to 2024. (v) After a period of “wait and see,” the decline in import shares from China spread to contract-intensive and relationship-sticky goods by 2021–2024. (vi) Trade reallocation has already accelerated after Liberation Day, in favor of trade partners facing lower additional tariffs and with geographically proximate supply networks. Together, these findings show that the US-China tariff shocks have unwound the US’ sourcing from China back to where it stood at the time of China’s WTO accession.
We quantify the macroeconomic effects of large tariff increases in a New Keynesian model calibrated to the United States and the rest of the world. We study both a unilateral 10 percentage point US tariff increase and a retaliatory trade-war scenario of similar magnitude. A central distinction is between short-run dynamics, when prices are sticky and trade and investment adjust gradually, and long-run outcomes after full adjustment. Across a wide range of assumptions on price setting, monetary policy, production structure, and trade elasticities, we find that tariffs are usually contractionary for the tariff-imposing country in the short run. They typically raise inflation, sharply reduce imports and exports, and may temporarily worsen the trade balance. In the long run, tariffs are consistently contractionary, with effects often larger than in the short run because of lower investment, weaker labor supply, and falling imported intermediate inputs. A unilateral US tariff may generate welfare gains through terms-of-trade appreciation, but these gains disappear under retaliation.
This paper introduces the Bilateral Trade in Services (BiTS) research dataset. BiTS draws primarily on the non-estimated trade values from the OECD–WTO Balanced Trade in Services (BaTIS) database. By harmonizing BaTIS data with information from the UNCTAD–WTO Trade in Services Database, UN Comtrade, Eurostat, and other official sources under a consistent BPM6 classification standard, BiTS enables analysis of bilateral services trade patterns for up to 245 countries and geographic entities and up to 39 years of data (1985–2023) for some country pairs. The dataset covers bilateral trade across 12 major BPM6 services categories, 9 of which are further disaggregated into 26 distinct subcategories. We illustrate the uses of this dataset through two applications. The first shows that “gravity forces” have become less powerful in explaining services trade patterns over time, due to a shift in the composition of trade toward less distance-sensitive services. The second documents that overall services trade remains resilient to growing geopolitical fissures, but that modern services appear more sensitive to geopolitical alignment than traditional services.
We examine the implications of the international agreement on a minimum corporate tax for multinational investment, measured using forward-looking effective tax rates (ETRs). We show that Pillar Two breaks the equivalence between otherwise equivalent forms of efficient economic-rent taxation—cash-flow taxation and an allowance for corporate equity (ACE). When the top-up tax binds, the minimum tax can fall on the normal return under systems that would otherwise be neutral. Moreover, the marginal effective tax rate (METR) under a cash-flow tax is weakly lower than under an ACE. A key policy implication is that, to preserve efficiency, domestic profit tax design can aim to avoid a binding minimum tax—for example, by combining a cash-flow tax with a statutory rate of at least 15 percent. We apply the ETR methodology to a cross-country sample and illustrate magnitudes under Pillar Two, showing that jurisdictions with statutory rates below 15 percent experience higher ETRs once the top-up tax applies than in the pre–Pillar Two baseline. Finally, the framework clarifies how the minimum tax interacts with investment incentives, enabling quantification of how Pillar Two reshapes ETR differentials relevant for multinational location decisions and international capital allocation.
In an economy with infrequent nominal wage adjustment, positive trend inflation erodes real wages between adjustment periods. With incomplete financial markets, this erosion amplifies idiosyncratic consumption volatility and reduces household welfare. We quantify this mechanism using monthly administrative labor income data from Argentina under low- and high-trend inflation. We estimate a statistical model of monthly labor income risk that incorporates wage adjustments both within and across jobs, and embed it in a Bewley-Aiyagari model. An increase in trend inflation from 0 to 22
We introduce cognitive discounting into a standard dynamic stochastic general equilibrium (DSGE) model to address the forward guidance puzzle and propose an estimation strategy that employs system priors to ensure data-consistent responses to monetary policy. We show that implementing cognitive discounting as in Gabaix (Am Econ Rev 110:2271–2327, 2020) does not, by itself, resolve the forward guidance puzzle. In particular, attempting to replicate empirically estimated forward guidance effects substantially dampens the effectiveness of conventional monetary policy, contradicting empirical evidence. Our findings show that the coexistence of empirically plausible effects of both conventional monetary policy and forward guidance requires a degree of cognitive discounting that is specific to announcements of future policy shocks. This idiosyncratic discounting may stem from factors such as credibility constraints in forward guidance communication.
How does fiscal foresight affect long-term interest rates? We construct a novel daily fiscal foresight index using natural language processing on over 120,000 Japanese newspaper articles. Accounting for endogeneity and non-stationarity, we find that negative fiscal news raises government bond yields, especially at longer maturities. Quantitatively, a one-point deterioration in fiscal sentiment increases 5-, 10-, and 20-year JGB yields by 0.558, 1.731, and 1.481 basis points, corresponding to approximately 1.534, 4.757, and 4.070 basis point increases for a one-standard-deviation change. This effect weakens under quantitative and qualitative easing, suggesting that unconventional monetary policy dampens market responses. To identify underlying channels, we then examine exchange rate responses to fiscal news. Yields rise with yen appreciation under normal conditions, but not during fiscal stress, indicating that sovereign risk, rather than demand–supply shifts, drives rate increases.
This paper uses high-frequency, disaggregated price data together with standard structural-break techniques to provide policymakers with more timely and precise signals of inflation dynamics. Our contribution lies in leveraging granular datasets to provide early signals of inflation turning points. We measure underlying inflation trends using the slope of the log price index, a choice that helps reduce noise relative to conventional inflation rates, and then employ break-detection methods to identify significant shifts. We apply this framework to study two recent episodes: Argentina’s 2024–2025 disinflation and the inflationary impact of US tariff adjustments in 2025. For Argentina, we detect a broad-based disinflationary turning point in May 2024. For the USA, we find evidence of a turning point in February 2025, with significant sectoral accelerations despite stable aggregate measures. These case studies highlight the usefulness of applying structural-break methods to the slope of price indices for improving real-time inflation monitoring and policy decision-making.
Macroprudential FX regulations aim to reduce systemic currency-mismatch risks, yet their distributional effects on firms’ access to credit remain poorly understood. This paper studies Peru’s 2014 dedollarization policy, which sharply increased reserve requirements on banks’ dollar liabilities in proportion to their dollar lending to nontradable firms. Exploiting cross-sectional variation in banks’ exposure to the policy and using administrative loan-level data covering the universe of firms, I find that moving from the median to the 75th percentile of exposure is associated with a reduction in the growth of new total loans—the sum of dollar and local currency loans—, by roughly 10 percentage points for micro and small firms, with no significant effects for medium or large firms. Larger firms absorb the contraction in dollar credit by reallocating borrowing across banks and into local currency credit, whereas micro firms experience significant declines in both dollar and total credit, higher borrowing costs, and modest employment losses. The results highlight a trade-off between macroprudential objectives and credit access for small firms.
How have aggregate income and welfare in the United States been affected by globalization and rapid productivity growth in emerging economies? We use the class of constant elasticity trade models to provide quantitative evidence on these questions. We find that reductions in worldwide trade frictions over the period from 1960 to 2020 reduced the share of the United States in global GDP but raised its aggregate welfare. Similarly, productivity growth in Japan and China led to a decline in the relative income of the United States, but brought aggregate welfare gains from the resulting expansion in global production possibilities. Trade integration and foreign productivity growth have relatively modest effects on domestic income and welfare compared to domestic productivity growth.
This paper studies the micro-level dynamics of firms’ borrowing during sudden stops. Using data on the universe of loans in the Uruguayan economy, we provide evidence on three channels of transmission driving these episodes: a lender channel, which links borrowing adjustments to the balance sheets of financial intermediaries; a collateral channel, which links these dynamics to changes in collateral values; and a risk channel, which connects them to changes in external risky borrowing costs. We show that the lender channel significantly strengthens during sudden stops, suggesting that the distinctiveness of these episodes, relative to regular business cycles, may lie in acceleration mechanisms tied to financial intermediaries’ balance sheets. Finally, we document that the channels tend to be stronger for unsecured loans and risky firms, suggesting an important role of risk in driving the credit dynamics observed during sudden stops.
Preferential trade agreements (PTAs) have increased rapidly in number since the 1990s and have extended their traditional focus on tariff reduction to include deeper integration in policy areas beyond the WTO mandates. This paper uses a comprehensive dataset on the content of PTAs and proposes two new measures of PTA depths, to quantify the impacts of PTA depths on bilateral trade flows and national welfare across the world for the period 1980–2015. We also develop an iterated estimation and bootstrap procedure to estimate the GATT/WTO membership effects on trade costs within the same structural framework and evaluate the interaction of PTA depths and the GATT/WTO. The results indicate that PTAs that are deeper (by different definitions) contribute to larger trade growth and welfare gains, and the depth of PTAs enhances the complementarity between regional integration (via PTAs) and multilateral trade liberalization (via GATT/WTO).
We study optimal monetary and exchange rate policy in a small open economy facing oil price shocks. In a model with segmented financial markets that generate endogenous UIP deviations, the first-best allocation is achieved through a combination of interest rate policy and foreign exchange intervention (FXI). Monetary policy stabilizes domestic inflation and the output gap, while FXI targets the UIP wedge to offset financial frictions. Oil price shocks endogenously move the net foreign asset position, giving rise to financial imbalances that make FXI essential-a mechanism distinct from exogenous financial shocks highlighted in the literature. Quantitatively, for a calibrated oil exporter, suboptimal regimes such as a free float or a simple peg entail sizable welfare losses of around 2% in consumption-equivalent terms, though peg, and especially peg with fuel subsidies, can outperform free floats. Overall, FXI is crucial to break the destabilizing link between real commodity shocks and financial risk premia.
