The recent decades have witnessed a remarkable surge in machinery imports from China to African economies. Our study examines the causes and local implications of these imports. Notably, we find that China’s efforts to decommission excess capacity have been a driving force behind this trend. Chinese city industries that face urgent capacity elimination requirements imposed by the government tend to export machinery equipment to emerging markets, particularly African countries with weaker environmental regulations and abundant resources. By using instrumental variables based on China’s annual lists of eliminated capacity, we find mixed effects of machinery imports on African economies. They increase output and value added in recipient industries that use the imported machinery, but have limited effects on employment and intersectoral linkages. Nevertheless, labor markets in affected regions reallocate away from agriculture toward both high-skilled and low-skilled occupations. These regions also experience higher pollution levels and increased nighttime light intensity.
Interest rate spreads vary widely across time and countries and are a central driver of business cycles in emerging market economies (EMEs). Since 2008, advanced market economies (AMEs) have exhibited persistently higher and more volatile spreads, alongside increased macroeconomic volatility and stronger co-movement with EMEs. We document six facts showing that AMEs have become more similar to EMEs along key dimensions. We interpret these patterns through a small open economy model and uncover a stark dichotomy: higher spreads reflect greater indebtedness and lower debt tolerance, whereas greater macroeconomic volatility and co-movement are driven by stronger global shocks.
Domestic policies regulating the horizontal dimensions of product differentiation can impede international trade and have become a major concern in contemporary trade negotiations. We estimate trade frictions associated with incompatible designs of electric plugs, a well-known example of a horizontal regulatory barrier. Our findings indicate that fewer electronic devices are exported to destinations with incompatible electric plugs, and this effect operates through both the extensive margin and the intensive margin of exports. These results are further corroborated by an online survey of Chinese electronics exporters. Moreover, incompatible plugs are associated with lower average quality of exported electronic devices, suggesting that horizontal regulatory barriers are linked to variation in the vertical dimension of product differentiation.
This paper examines the international dimension of the post-pandemic inflation surge. We estimate an extended structural vector autoregressive (SVAR) model for Norway, Sweden, the United Kingdom, and the United States to disentangle domestic and foreign drivers of inflation. Foreign supply and demand shocks are identified through novel restrictions on import prices and trading-partner output, consistent with a simple New Keynesian model featuring firm-to-firm trade in intermediate inputs. Our results show that international demand shocks played a major role across countries. Foreign supply shocks absorb some explanatory power from domestic supply shocks, but demand factors remain the prevalent source of inflation.
How do U.S. monetary tightening shocks affect emerging market economies, and how does the impact depend on these economies' own macroeconomic vulnerabilities? We examine this question in a model that combines financial frictions with imperfect anchoring of inflation expectations, a key vulnerability in emerging markets. The degree of anchoring is disciplined using evidence that inflation expectations in emerging markets respond significantly to inflation surprises. Imperfect anchoring amplifies the contractionary effects of U.S. monetary shocks on emerging markets but also generates increases in inflation and nominal interest rates, patterns that we show are consistent with the empirical evidence but are not well explained by existing models. Our analysis also distinguishes between the drivers of U.S. policy tightenings. U.S. interest rate hikes resulting from stronger demand, rather than exogenous policy shocks, lead to modestly positive spillovers for emerging markets with well-anchored inflation expectations, but to substantial slowdowns in those with less-well-anchored expectations.
Central bank policy decisions shape the economy both by influencing market conditions and by affecting expectations. These expectations can be driven by two simultaneous shocks: monetary and information shocks. Identifying the information shock as one with a non-negative effect on expectations, this paper shows that such shocks are highly relevant in emerging markets. In particular, inflation and output forecasts tend to increase in the short run following an unexpected rise in the policy rate. This pattern can be reconciled with baseline New Keynesian models only if the policy rate gives information about shocks that generate a positive co-movement between the interest rate, inflation, and output. The findings suggest that information shocks are an important part of monetary policy surprises.
Policies aimed at promoting currency internationalization often target frictions in both capital and current account transactions. We study this two-pronged approach using a dynamic general equilibrium model in which an international currency serves as both a store of value and a medium of exchange. Due to the complementarity between different functions of an international currency, a two-pronged approach is more effective than policies with a single focus. We analytically characterize this policy complementarity and apply the model to China’s renminbi internationalization reforms during 2010-2021. We find that: (1) These reforms reduced the return wedge on foreign held renminbi bonds by 4.1 percentage points (p.p.) and lowered the cost of renminbi-settled international trade by 0.9 p.p. in trade-revenue equivalent. (2) Policy complementarity accounted for half of the overall policy effect. (3) A single-focused policy — targeting only capital (current) account frictions — would have raised fiscal costs by a factor of 2.1 (1.8).
Since the launch of the euro, the Euro Area has combined weak growth with persistent trade surpluses, a rising trade share, and the absence of a real exchange rate trend. In academic and policy debates, the Euro Area's trade surplus is often viewed as reflecting weak domestic aggregate demand. This paper argues that a purely demand-based view of the trade balance is incomplete. Using an estimated two-region framework, we find that slower productivity growth in the Euro Area has been a major driver of the trade surplus since 1999, while demand shocks play an important role in the rising trade balance following the global financial crisis. We further show that real exchange rate dynamics cannot be understood from productivity growth differentials and aggregate demand shocks alone, but also reflect longer-run shifts in trade patterns.
This paper examines how trust among ultimate owners and their affiliates shapes business group structure and correlates with firm productivity. We first confirm that greater business group verticality is associated with higher firm productivity. We then develop a theoretical model explaining how bilateral trust influences group verticality. To test these predictions, we construct a novel dataset by developing an algorithm that extends Amadeus ownership links into ownership chains, allowing us to measure verticality for a large European sample. We find that groups with higher average trust among members are more vertically structured. Firm-level estimates indicate that more trustworthy affiliates are positioned in a layer closer to the ultimate owner and exhibit higher productivity. Results are robust to using somatic distance as an instrument for bilateral trust.
Deviations from covered interest rate parity (CIP) have persisted since the global financial crisis, reflecting a segmentation between onshore (US) and offshore dollar markets. This segmentation can give rise to dollar shortages in offshore markets during periods of financial stress. We propose a model with limited CIP and UIP arbitrage where the CIP deviation and exchange rate are jointly determined by equilibrium in the swap and spot FX markets. We consider offshore dollar funding shocks, where either the supply of dollar funding by the US to offshore markets declines or the demand for dollar funding in offshore markets rises. We show that this gives rise to dollar shortages, with a rise in the CIP deviation and appreciation of the dollar. In contrast to other models of exchange rate determination, the dollar appreciation is entirely due to imperfect CIP arbitrage.
The slowdown in globalization has been analyzed primarily from the viewpoint of trade and aggregate investment. Based on a rich micro-level dataset of worldwide affiliate networks of European MNEs, we define an episode approach to (i) analyze the extent and direction of foreign network restructuring between 2010 and 2019, and (ii) estimate its effects on home-country activity. We find evidence of a strong rise in contraction episodes and a substantial fall in expansion episodes in the second half of this decade. Both contraction and expansion episodes have increasingly gone hand in hand with a reorientation towards geopolitically aligned countries (friendshoring) and a reduced geographic scope (nearshoring). We do not find any systematic increase in home-country activity for networks that contract abroad, neither along the extensive nor the intensive network margin. By contrast, foreign expansion episodes are associated with increased parent activity and a rise in the number of domestic affiliates.
We study the internationalization of the Chinese renminbi (RMB) leveraging a unique policy experiment. In 2023, amid a dollar shortage, Argentina expanded a currency swap line with China. The share of imports from China invoiced in RMB surged rapidly, displacing the dollar, which had previously accounted for virtually all invoicing. Following the presidential election of late 2023, as the dollar shortage eased, invoicing in RMB declined. We explore the mechanisms behind this pattern, using firm-level data on imports, bank-firm loan relationships, and bank balance sheets. We find that banks played a key role. Firms with pre-existing relationships to banks with limited US dollar loans were more likely to switch to RMB. In addition, firms borrowing from a Chinese state-owned bank were more likely to use RMB. We also document firm-level spillovers, with RMB use for imports from China increasing RMB use for imports from other countries. Finally, firms switching to RMB saw increased total imports.
How do production networks and market structure interact to shape the effects of trade and competition policy? We develop a model with two-sided firm heterogeneity, matching frictions, and imperfect supplier competition. More productive buyers match with more suppliers, inducing tougher supplier competition, lower input costs, and higher profits. Entry upstream thus benefits high-productivity buyers, while lower trade or matching costs favor mid-productivity buyers. Empirical evidence confirms that larger French and Chilean firms import higher quantities at lower prices as more Chinese suppliers enter, and that suppliers charge diversified buyers lower markups. We adapt methods for combinatorial, discrete-choice problems to estimate the model and perform counterfactuals. The interaction of endogenous networks and markups significantly amplifies the gains from policies that facilitate supplier entry or firm matching, and from deep trade agreements that combine tariff cuts with such policies. Fixed networks dampen while fixed markups amplify the gains from traditional tariff liberalization.
This paper explores the impact of international experience on worker mobility, with a focus on Swedish companies acquired by foreign multinationals. We posit that international experience, by imparting knowledge about foreign operations, enhances an employee's appeal to multinational enterprises (MNEs). By matching acquired firms with comparable control firms and using a stacked difference-in-differences methodology, we observe a significant impact of foreign acquisitions on job mobility. Our results indicate that foreign acquisitions raise the likelihood of switching to another MNE by 3.6 percentage points, while reducing moves to local firms by approximately 4 percentage points. Furthermore, workers who transition to another MNE post-acquisition have significantly higher wage growth compared to those who stay. Additional analyses reveal that the positive effect on mobility to MNEs is linked to learning opportunities stemming from increased trade linkages within multinational production networks and the implementation of advanced technologies after an acquisition.
Using one million procurement contracts awarded in France and Spain, we quantify the importance of home bias in explaining governments' purchases. First, we exploit that "home" has a different meaning for subnational and national governments and identify their relative home bias by comparing how local and non-local establishments sell to national and subnational agencies within a region. Second, we exploit a reorganization of French regions, to estimate how "new local" establishments sell to governments after the reform. Using a quantitative trade model, we find that governments' home bias increases local expenditures shares by 29% and reduces governments' output by 8%.
We provide the first systematic evidence on the short-run labor market consequences of the 25% decline in Canadian visits to the United States in 2025. We combine smartphone foot-traffic data measuring Canadian visitor presence at the ZIP code & times; industry level with real-time establishment-level employment records. Exploiting the high heterogeneity in exposure to Canadian visits, we find that small establishments in the top 1% exposed local-industry markets experienced employment declines of about 6% compared to less exposed ones. Our estimates imply between 13,900 and 42,100 jobs lost, concentrated in a small number of localities.
