The purchasing power parity (PPP) hypothesis is based on the stationary characteristics of long-term real exchange rate behaviors. However, the nonlinear regime transitions and asymmetric behaviors observed in the economic time series lead to the inadequacy of traditional linear tests. In this study, a specific form of a nonlinear unit root test is proposed by employing robust estimation methods in time series analysis. An extremum-type test statistic, developed for an ESTAR-type unit root test through the estimation of long-run variance using a smoothed autocovariance estimator, is examined via Monte Carlo simulations to determine its critical values and size-power properties. The small-sample performance of the proposed test indicates the absence of size distortions. Power analysis results demonstrate that the proposed test outperforms comparable tests with similar structures. In the empirical analysis, the validity of purchasing power parity for the G10 countries is assessed by comparing the stationarity of the real effective exchange rate using both the proposed test and a conventional nonlinear unit root test. The findings show that the proposed test rejects the null hypothesis more frequently than similar unit root tests. The size and power properties of the proposed test suggest that it can serve as a viable alternative to existing approaches.
This paper investigates how global and domestic uncertainty shocks dynamically affect inflation and financial conditions across twenty diverse economies. Based on country-specific structural vector autoregression models with monthly data from 2009 to 2025, the empirical findings reveal substantial cross-country heterogeneity. Global uncertainty predominantly acts as a deflationary shock that systematically eases domestic borrowing costs, whereas domestic uncertainty produces more localized and muted effects. Second-stage cross-country regressions demonstrate that structural characteristics dictate the severity of these shocks. Notably, fixed exchange rate regimes yield a positive structural coefficient, indicating they act as a buffer that significantly weakens the baseline deflationary pass-through of global uncertainty compared to flexible regimes. The analysis also uncovers a positive alignment between the responses of inflation and interest rates, providing evidence that financial markets systematically tighten borrowing conditions in response to inflationary uncertainty and ease them in response to deflationary uncertainty.
This paper analyzes the impact of the open-economy trilemma on banking risk. Since no country can fully achieve monetary independence, exchange rate stability, and financial openness simultaneously, most adopt intermediate policy configurations. The study investigates whether a more convergent policy combination, composed of partial financial integration, managed exchange rate flexibility and partial monetary independence, reduces banking risk, and seeks to identify which policies of the trilemma best act to reduce banking risk. To examine the relationship between the trilemma policy choices and banking system stability, the latter represented by the Z-SCORE as an indicator of banking risk, we analyze a dataset covering 92 countries from 2000 to 2019, particularly considering the repercussions of the 2008 GFC. The results indicate that greater monetary policy independence and exchange rate stability reduce banking risk, while higher financial openness and more divergent policy arrangements increase it. This study is the first to examine the relationship between the open-economy trilemma configurations and banking risk. By employing a broad cross-country sample and the trilemma policy divergence index, we provide novel insights into how different policy combinations influence financial stability.
In the contemporary era of globalization, international factor mobility, in the form of international migration and foreign direct investment, has become a decisive force in shaping India’s economic landscape. Therefore, this study investigates the factors responsible for Indian bilateral emigration and inward FDI stock and subsequently analyzes the nature of their interrelationship: substitute or complement. To conduct the analysis, we use a panel dataset, considering India as the reporting country with 88 partner countries worldwide from 2000 to 2020, and employ both single- and simultaneous-equation model estimation techniques. Our empirical analysis suggests that the gravity and cultural linkage measures – GDP source and host, distance, common language, and colony; trade openness of source and host countries; the migration-specific factors – remittances, employment rate, educational quality, internal conflict; and FDI-specific factors – exchange rate volatility, inflation rate, corporate tax, and natural resources are the primary drivers of Indian bilateral emigration and inward FDI. Furthermore, this study finds that an increase in bilateral inward FDI reduces emigration to partner countries by 61.53
We examine the relationship between fiscal rules and capital controls across 100 countries spanning 1995 to 2019. Employing entropy balancing and alternative estimation techniques, our findings show that the adoption of fiscal rules is significantly associated with reduced reliance on capital control measures. The estimated association is notably stronger in developed countries. These results remain robust when addressing potential omitted variable bias, employing alternative estimation approaches, and accounting for structural factors. A heterogeneity analysis reveals that fiscal rules are associated with reduced controls on both capital inflows and outflows. From a dynamic perspective, fiscal rules are also associated with reduced capital controls across short, medium, and long-term horizons. Investigating the underlying mechanisms, the results indicate that fiscal rule adoption is associated with reduced capital control practices through three channels: enhancing sovereign credit ratings, containing inflation, and strengthening fiscal balances. Overall, these findings suggest that implementing stringent fiscal rules may facilitate the reduction of capital controls, thereby potentially fostering greater economic freedom and deepening international financial integration.
This paper argues that the common practice of Bayesian estimation in applied macroeconomic DSGE modeling can lead to severely biased results when the imposed prior beliefs are misspecified. We demonstrate, through controlled Monte Carlo experiments on two canonical DSGE models (a Real Business Cycle model and a New Keynesian model), that Bayesian estimation may yield misleading parameter estimates, often gravitating toward the researcher’s prior at the expense of empirical accuracy. In contrast, we show that Indirect Inference, a simulation-based classical estimation approach, remains largely unbiased and robust even under substantial model uncertainty. These findings suggest that heavy reliance on Bayesian estimation can perpetuate false conclusions (for example, overstating nominal rigidities) and thereby misguide policy analysis. We advocate greater use of robust estimation and model validation techniques, like Indirect Inference, to ensure that model-based policy guidance rests on credible empirical foundations.
The present analysis examines whether the effect of investment-oriented remittances (IOR) flows on intra and external African manufactured exports depends on the amounts of Aid for Trade (AfT) that accrue to African countries. IOR flows are the portion of international remittances inflows used to create new firms or to facilitate venture funding access in the migrants’ home countries. AfT flows are resource flows that help developing countries (especially African countries) improve their participation in international trade. The analysis uses an unbalanced panel dataset of 47 African countries over the annual period from 2005 to 2021. It utilizes mainly the Seemingly Unrelated Regression estimator, and for robustness check, the two-step system Generalized Method of Moments. Empirical findings indicate that IOR flows are complementary with total AfT flows in promoting both intra and external African manufactured exports, although the magnitudes of these effects vary across different degrees of manufactures. These findings shed light on how important IOR flows are—including in complementarity with AfT interventions—for enhancing manufactured exports by African countries.
This study investigates whether the long-run and short-run impacts of capital inflows and their main components (portfolio equity, FDI and other investments) are expansionary or contractionary in emerging market and developing economies (EMDE). In this context, we also consider the key main growth determinants suggested by the endogenous growth theory along with variables representing global financial conditions and capital openness. To investigate the impacts of capital inflows and their main components on growth, we employ both fully-modified ordinary least squares and panel autoregressive distributed lag estimation methods. The estimation results suggest the presence of cointegration between the variables and support the convergence hypothesis. We find that all types of capital inflows, except portfolio equity, are expansionary both in the short and long-run. Portfolio equity inflows tend to enhance economic growth only in the long-run. Moreover, the impacts of foreign and domestic savings on growth indicate that they are complementary rather than substitutes. Finally, our findings suggest that capital inflows encourage growth in good times but dampens in bad times leading to magnify the amplitude of boom and bust cycles.
This study examines the time-varying impact of global value chains (GVCs) on the exchange rate elasticities of merchandise exports using a panel of 124 countries from 1995 to 2018. The time-varying coefficient (TVC) regressions reveal that export elasticities progressively weakened from the 1990s to the early 2010s, which coincided with intensive trade liberalization and the exponential rise of GVCs prior to the global financial crisis. After plateauing in 2012, export elasticities slightly strengthened during the late 2010s, a period overlapping with “slowbalization”, supply chain disruptions, and trade tensions. These results suggest that export elasticities negatively co-evolve with the globalization cycle, with stronger sensitivity observed when GVCs are less important and standard expenditure-switching mechanisms dominate. Consistent with the static fixed effects regressions, the TVC results confirm that GVC participation attenuates export elasticities primarily through backward transactions, while forward linkages likely produced an offsetting effect. This is mainly traced to the contrasting impact of real depreciations on external competitiveness and the cost of foreign value added in exports. The results are robust across various specifications of the TVC model.
This paper examines the effects of regional financial cooperation among economies at risk of financial crises (“sudden stops”), with a focus on business cycle correlations among member countries. The analysis is based on a small open economy model that incorporates liability dollarization and an occasionally binding borrowing constraint, and mutual liquidity provision is introduced. Simulation results show that financial cooperation can reduce the likelihood of a sudden stop and improve welfare by supporting collateral values and facilitating consumption smoothing. When the policy is implemented for wide range of recessions, its crisis-prevention effect is stronger for economies with positively correlated output. This is because the expectation of simultaneous recessions induces a precautionary saving motive and mitigates the increase in borrowing driven by excessive risk taking in normal times. In contrast, welfare gains from cooperation are larger for countries with negatively correlated shocks, implying a trade-off for policymakers between crisis prevention and welfare effects. Simulations using data from selected Southeast Asian economies indicate that such cooperation can lower crisis probability and enhance welfare, although the effects are limited at the current scale of these policies. These findings could provide useful guidance for the design and adoption of regional financial cooperation.
Over recent decades, international reserves have risen across countries. While prior research has largely explained this trend through precautionary and mercantilist motives, the influence of fiscal institutions has received limited attention. This study explores the role of fiscal rules as an important, though often overlooked, determinant of reserve accumulation from the perspective of fiscal governance. Using panel data for 93 countries from 1990 to 2020, we find that the implementation of fiscal rules is significantly and negatively associated with the ratio of reserves to GDP. This relationship remains robust across alternative specifications and estimation methods. Additional evidence indicates that lower reserve demand under fiscal rules is accompanied by reduced consumption and improved current account balances. These findings suggest that international reserve accumulation is closely linked to fiscal institutionalization, implying that credible fiscal rules can enhance the efficiency of reserve policy and contribute to more effective international liquidity management.
We examine the relationship between populism and central bank independence (CBI). Using annual data from around 60 countries between 1996 and 2018, and employing a correlated random effects panel framework, we find that higher levels of populism within a country are associated with a significant reduction in the legal independence of its central bank. However, cross-country differences in populism have no significant effect. Contrary to popular belief, populist regimes are not more likely to replace central bank governors before the end of their term. This suggests that intensified political pressure, rather than early dismissal, is the dominant influence.
This paper analyzes the impact on financial flows of institutional factors promoting financial integration, or trying to tame them, such as capital control or macroprudential policies. We use a detailed database of bilateral financial assets and construct gravity models for foreign direct investment (FDI), portfolio equity and debt, and other investment. Capital control policies have limited and disparate effects. The impacts of macroprudential measures are complex, with measures in the origin country’s financial sector having a positive impact on outward capital flows for FDI and portfolio equity especially. European integration has on the whole played a positive role. We also emphasize the benefits of cooperation between origin and destination countries.
Inbound tourism is a typical exporting sector of a travel destination whose customer base is mainly composed of non-local residents or even foreigners. Accordingly, most of a casino tax imposed by the destination is exported to gambling tourists. This study demonstrates that gaming taxation can be efficient for the destination if it is a monopoly place for casinos in surrounding regions and if its market structure is not competitive but oligopolistic within the locality. The resultant market power strengthens the destination’s ability to export local taxes to tourist customers via price hikes when the external demand for gambling is sufficiently strong and price-inelastic. This favorable result on the joint effects of casino tax and market power is proven theoretically by an economic model in our work. Such effects are confirmed empirically by significant evidence found from Macao as the world’s largest casino resort in terms of casino revenue.
Different from the traditional bilateral analysis framework of international trade, this study adopts a multilateral analysis perspective of the international trade network (ITN). Based on the panel data of 142 countries from 2005 to 2023, it explores the impact of the Belt and Road Initiative (BRI) on the economic growth of BRI countries and its mechanism. The results indicate that: (1) the BRI promotes the economic growth of BRI countries; (2) the BRI expands the breadth and intensity of trade links among BRI countries and between BRI countries and other countries around the world, and improves the ITN status of BRI countries; (3) mechanism analysis provides supportive evidence for the ITN status enhancement channel, with the unweighted ITN status having a greater promoting effect than the weighted ITN status; (4) the BRI generates trade creation effects for BRI countries. The conclusions of this paper offer valuable policy implications for exploring the new path of the BRI to promote the economic growth of the BRI countries from the perspective of ITN.
This paper employs a Global Vector Autoregression (GVAR) model using quarterly data from 2000Q1 to 2024Q4 to examine the spillover effects of GDP growth, export, and import shocks originating in China and the United States on six Association of Southeast Asian Nations (ASEAN) economies (Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam). Foreign variables are constructed with time-varying bilateral trade weights, and transmission dynamics are evaluated using generalized impulse response functions (GIRFs). The results reveal that import shocks dominate, followed by GDP shocks. Export shocks are smaller but economically meaningful. Adjustments in financial variables move smoothly, underscoring that the primary transmission operates through real activity and trade channels rather than abrupt financial dislocations. The effects peak in Malaysia, Singapore, Thailand, and Vietnam, whereas responses in Indonesia and the Philippines are substantially weaker.
Wealth inequality in the United States of America is high, with the top 1% holding a share of around 30% of the total wealth. Inflation hits harder the low-income households, which exacerbates the gap, but inflation also reduces the wealth of top 1%. Given this practical issue, the question is: Does inflation increase or reduce the wealth inequality of top 1% in the USA? The response to this question is a prerequisite for creating an equitable, stable, and resilient economy by allowing policymakers protect the most vulnerable from the disproportionate harm of rising prices. Therefore, this paper assesses the impact of USA inflation on inequality in the case of top 1% in the period 1989-2024 by employing the autoregressive distributed lag model (ARDL model) that allows us to check the wealth inequality-inflation nexus on both long and short-run. The results showed that inflation with its components and volatility consistently reduced inequality in the long and short-run in both the share of wealth and financial assets for top 1%. Unlike previous studies for USA, this paper shows that self-employment acted as a key mediator that decreased inequality making self-employment as a tool for poverty reduction and income equalization.
This paper examines the spillover effects of the U.S. Federal Reserve (Fed) and the European Central Bank (ECB) monetary policies on Türkiye, providing broader lessons for emerging markets. We explore the distinct impacts of three dimensions of monetary policy: interest rate changes, forward guidance, and quantitative easing (QE), on key financial and macroeconomic variables in Türkiye by applying a Bayesian VAR model. Our findings reveal that while both the Fed’s and the ECB’s policies influence Türkiye’s economy, the U.S. monetary policy generally produces larger and more persistent effects. The results also indicate that the transmission of monetary policy shocks from the Fed and ECB to Türkiye differs across various policy instruments. While interest rate changes primarily affect financial variables, forward guidance and QE shocks appear to have a greater effect on output and inflation. These findings underscore the heterogeneity of monetary policy spillovers and highlight the importance for emerging market policymakers of closely monitoring advanced economy policy shifts to safeguard financial stability and support economic growth.
