ABSTRACT This article examines the role of alternative monetary policy rules in shaping exchange rate pass‐through and macroeconomic dynamics in a small open economy. To this end, we develop and estimate a Bayesian dynamic stochastic general equilibrium model featuring a conventional monetary policy rule and an exchange rate‐augmented monetary policy rule. The results show that incorporating exchange rate movements into the monetary policy rule lowers exchange rate pass‐through and weakens the transmission of external shocks to domestic inflation. Results from impulse response and conditional variance decomposition analyses reveal that the exchange rate‐augmented monetary policy rule enhances the economy's resilience to external disturbances. In addition, recursive forecasting shows comparable predictive performance under both policy rules, albeit modest improvements in interest rate forecasts under the exchange rate‐augmented monetary policy rule. Counterfactual analysis further complements the empirical relevance of the exchange rate‐augmented monetary policy rule. Policy‐wise incorporating exchange rate considerations into monetary policy can strengthen macroeconomic stability and policy transmission in small open economies such as India.
ABSTRACT We use a large episode of trade liberalization in Spain to test a rich set of channels linking trade and markups. The effect of reductions in import tariffs on firm‐level and aggregate markups is pro‐competitive, but there are offsetting effects via other channels. We show that firms with high intangible investment experience a weaker reduction in markups. This provides evidence for the concentration channel highlighted by recent theoretical work. We find weak evidence for reallocation effects and conclude that the relationship between trade and markups is mostly driven by changes at the intensive margin, changes in firm‐level markups.
ABSTRACT This paper investigates the impact of cross‐border mergers and acquisitions (M&A) on the post‐acquisition productivity of domestic firms. New panel data on the entry, duration, and exit of acquired domestic firms are constructed to measure the post‐acquisition period accurately. A staggered difference‐in‐differences (DiD) framework is employed to account for variation in acquisition timing and to estimate the average treatment effects of foreign acquisition. Conventional two‐way fixed effects regressions show significantly positive productivity effects. However, the staggered DiD approach yields statistically insignificant estimates for the productivity effects, suggesting neither productivity gains nor adverse effects for acquired firms. Even after accounting for general acquisition effects, foreign ownership changes have no significant productivity effects. Given the potential bias in the conventional DiD, it is crucial to address heterogeneous treatment effects of foreign acquisition.
ABSTRACT This paper examines whether government green procurement promotes firms' green exports in China. Using firm‐level data, we find that firms included in government green procurement lists export 39% more environmental products on average than other firms. Mechanism analyses suggest that the effect operates through scale expansion, reduced financial constraints, and enhanced green innovation. The effect is more pronounced for foreign‐owned firms, export‐oriented private‐owned firms, large firms, and firms located in financially developed cities. We further show that the increase in green exports is driven primarily by the extensive margin rather than the intensive margin. On average, procurement‐listed firms export 0.8 additional green product varieties and serve 3.1 more destination countries. In addition, government green procurement increases the share of green exports in firms' total exports, suggesting that government green procurement may facilitate firms' green transition. Overall, the findings highlight the role of government green procurement in promoting green trade and shaping firms' environmental upgrading.
ABSTRACT Lobbying activities are important to promoting Free Trade Agreements (FTAs). This paper quantifies the influence of lobbying on the probability of ratification of three bilateral FTAs in the US Congress in 2011. I build a contest model where lobbying affects the ratification probability through votes in Congress. Results suggest that both supporting and opposing lobbying have large effects on the probability of ratification, but the total effect is less than 2%. Lobbying would be more efficient if expenditures were transferred between the House and Senate, as well as between Republicans and Democrats.
We investigate trade reallocations across countries during the US-China trade dispute. Using US import data, we find evidence of trade diversion in a range of industries and products, including products not targeted by US tariffs. We uncover three main underlying mechanisms. First, countries with a greater revealed comparative advantage in a product benefit more from these tariffs. Second, non-targeted products in similar industries are also affected, consistent with colocation effects. Third, countries that export more of a given product to the US because of the tariffs on China also export more of the same product to other countries as predicted by the Melitz model.
China's Belt and Road Initiative (BRI) has driven a global surge in large-scale infrastructure projects. While existing research has focused primarily on the BRI's effects on economic outcomes in participating countries, such as investment, trade, and debt dynamics, its economic and diplomatic implications for Western nations that do not participate in the BRI yet compete with China in global infrastructure development remain underexplored. This study addresses this gap by examining how the BRI has affected Japanese overseas infrastructure projects and Japan's diplomatic engagement with BRI countries. Using an event-study framework within a staggered difference-in-differences design and a panel of 123 low- and middle-income countries from 2007 to 2020, we find that the BRI significantly crowded out Japanese infrastructure projects and reduced visits to Japan by political leaders from BRI countries. These effects are especially pronounced among countries geographically proximate to Japan and China, where competitive pressures are most intense.
In response to the heightened tariffs imposed by the US on Chinese exports since 2018, China correspondingly imposed retaliatory tariffs on imports from the US. Using monthly disaggregated Chinese customs data for the period from January 2017 to December 2019, this paper analyzes how Chinese exporters respond to China's retaliatory tariff exposure in the US-China Trade War. The empirical evidence uncovers a vertical spillover effect, where the import-side shock of China's retaliatory tariffs transmits to the exports along the production chain, resulting in a concurrent decline in both the values and prices of Chinese exports to third markets. Mechanism analysis highlights the prominence of the export quality-downgrading effect as a pivotal determinant in the passing down, outweighing the influence of the competition effect. Furthermore, the impacts of retaliatory tariffs exposure are heterogeneous across export margins, trade modes, product categories, and destination markets.
Does economic openness enhance or diminish the effectiveness of money-financed (MF) fiscal stimulus? This study re-examines this question within a small open economy framework, emphasizing the fiscal regime governing government debt valuation. While the authors of an earlier study show that MF fiscal expansions generate larger output responses as openness increases, we demonstrate that this conclusion is not robust when the fiscal theory of the price level (FTPL) is operative. Under the FTPL, the relationship between openness and the output response to MF fiscal stimulus becomes fiscal-regime contingent. Specifically, under normal conditions, greater openness weakens the output response, reversing the positive openness-multiplier relationship documented in the existing literature. In contrast, under strong deflationary pressure such as at the zero lower bound, greater openness amplifies the output response, although through a distinct transmission mechanism. Our analysis is primarily a positive, regime-comparison study. As a supplementary normative benchmark, we also report a welfare comparison based on a second-order approximation of household utility. The broader implication is cautionary: policy conclusions drawn under a Ricardian framework may not generalize to environments in which fiscal-monetary interactions are central to price-level determination.
This paper examines the relationship between military expenditure and foreign direct investment (FDI) inflows in 61 low- and middle-income countries over 1990-2018, with a focus on how this relationship is shaped by conflict dynamics and institutional contexts. Using a dynamic panel estimator (Arellano-Bover/Blundell-Bond), we find that military expenditure has no significant effect on FDI in non-conflict settings. During conflict, however, higher military spending is positively associated with FDI inflows, suggesting that foreign investors may interpret such spending as a signal of state commitment to security. This effect is concentrated in lower-income and institutionally weaker countries, where military expenditure may substitute for weak governance as a signal to foreign investors. The effect is also strongest at conflict onset and in the early years of conflict but fades as conflicts persist. In addition, military expenditure increases FDI during minor conflicts but has no significant effect during major conflicts, and we find no evidence of anticipation effects from future conflicts. Overall, the results suggest that military spending can reassure investors in the short run under specific conflict conditions, but that its effectiveness weakens as conflict endures and does not replace broader institutional improvements.
This paper examines the effect of tariff cuts on labor market outcomes within a multi-country, multisector general equilibrium framework. Individuals self-assess the feasibility of earning a college degree when deciding whether to pursue higher education. Goods are produced using skilled labor, unskilled labor, and materials aggregated from domestically and internationally sourced intermediate goods. I provide a novel finding that tariff cuts can make education more affordable by reducing the prices of materials used in education production. A lower education price exerts upward pressure on the skilled labor supply, thereby placing downward pressure on the skill premium. Changes in the trade deficit following tariff cuts significantly influence the welfare response.
This article investigates how anti-dumping duties affect domestic consumer goods prices in China through price pass-through. Using monthly Chinese customs trade data and domestic agricultural prices from 2010 to 2020, and exploiting the 2020 anti-dumping duty on Australian barley through first-differenced regressions and a difference-in-differences design, we find incomplete pass-through: 40% of the duty is borne by Chinese importers, with the import-price pass-through effect estimated at 0.42. Tracking the duty along the industrial chain, we further document that the duty raises domestic barley prices and generates positive spillovers to substitute feed grains, including corn, sorghum, and soybeans, which in turn elevates downstream consumer-goods prices in the short run. Heterogeneity analyses show that processing-trade imports and low-income households are more exposed to the resulting price pressure.
This paper studies how trade policy can affect not only the level of markups but also the mode and intensity of competition in general equilibrium. We embed a tractable form of supply-function competition-where firms commit ex ante to upward-sloping supply schedules-into Neary's general oligopolistic equilibrium (GOLE) framework. Firms endogenously choose the slope of their supply schedules at a convex real-resource cost, which we interpret as a flexibility investment. In a symmetric two-country benchmark with per-unit tariffs, equilibrium reduces to a single scalar condition in aggregate supply responsiveness; when multiple roots arise, a local stability criterion selects the relevant branch. Comparative statics show that, on the stable interior equilibrium, higher tariffs raise equilibrium supply responsiveness and thereby change competitive conduct, with general-equilibrium implications for wages and welfare. Welfare falls because higher responsiveness crowds labor into flexibility investment and away from production.
This paper develops a framework to measure how markups amplify prices through global production networks and to attribute final-demand price wedges to upstream country-industry sources. The approach defines a compound markup as the ratio of observed prices to counterfactual pure-cost prices that would prevail if all markups in the network were one. Using an input-output price model under a Cobb-Douglas benchmark, the method yields an implementable mapping from direct markups to network-propagated wedges and an exact decomposition into upstream contributions. The framework is implemented with the World Input-Output Database 2016 release. The decomposition identifies upstream nodes with high markup centrality and quantifies the international incidence of the aggregate wedge, including destination-specific attributions that separate domestic from foreign contributions and an exact ordered ranking of foreign-incidence exposure across WIOD destinations. Compound markups provide a rigorous accounting of how market power propagates through global value chains, with most of the aggregate wedge explained by a small number of propagation rounds and concentrated upstream contributors.
The conventional wisdom is that high-productivity firms produce high-quality goods. However, using Chinese firm-level and highly disaggregated product-level transaction trade data from 2000 to 2007, this paper finds that such thinking is invalid, particularly for capital-intensive sectors: high-quality products are produced by low-productivity firms. Rich empirical search reveals that the mismatch between productivity and quality is mainly due to the role of processing trade: the productivity of processing firms is lower than that of ordinary firms, but the export quality is higher. Contingent on trade type, more productive firms export higher quality products. Further analysis demonstrates that processing firms' quality advantage stems from greater access to imported intermediate inputs. A heterogeneous trade model with novel elements of endogenously-chosen trade type and product quality is developed to explain the empirical findings.
This paper delves into the intricate relationship between uncertainty and remittance flows. Leveraging a new dataset of quarterly remittances combined with uncertainty indicators across 77 developing countries from 1990Q1 to 2019Q4, the analysis highlights that uncertainty in remittance-sending countries negatively affects remittance flows. In contrast, uncertainty in remittance receiving-countries has a more complex, dual effect. In countries with high private investment ratios, rising domestic uncertainty leads to a decline in remittances, suggesting that uncertainity discourages remittances intended for investment purposes. Conversely, in countries with low public spending on education and health, remittances increase in response to uncertainty, serving as a social safety net. The paper underscores the heterogeneous and non-linear effects of domestic uncertainty on remittance flows.
Since the 1990s, the proliferation of Regional Integration Agreements (RIAs) has created a complex trading environment where countries belong to multiple agreements simultaneously. The Spaghetti Bowl (SB)-a tangled web of overlapping agreements-has primarily been viewed as a visual metaphor. However, this overlooks its multidimensional nature and the interplay between membership and content overlap, lacking an empirical account. This paper presents a more formal, empirically grounded definition of the SB, using a network-based framework to measure it, capturing its multidimensionality and tracing its regional and temporal evolution with historical RIA data. In contrast to the linear SB growth implied by the traditional count of agreements, our network measures indicate that the SB was essentially nonexistent before 1970. This is followed by three distinct waves of SB growth. Our analysis shows the SB rapidly expanded in the 1970s, became regional in the 1990s and early 2000s, and has become increasingly global since 2010 due to Interregional RIAs. Furthermore, we argue that global entanglement levels are becoming more widespread, even as individual RIAs contribute less to the phenomenon. This recent increase in SB prevalence is underestimated by the method of counting the active RIAs.
We draw on recently derived measures of trade costs to test whether two measures of cultural proximity, bilateral trust and scores from the Eurovision Song Contest (ESC), are associated with trade costs. After controlling for distance, common border, geographical barriers, and other cultural proximity variables and using Ordinary Least Squares and Pseudo-Poisson estimation, we find that higher trust and ESC scores are associated with lower bilateral trade costs. Interestingly, and consistent with the literature on informational barriers, the negative cost association between ESC scores and trade costs is substantially stronger for trade in manufacturing (differentiated) goods and negligible for agricultural (homogeneous) goods, and the magnitude of the effect increases when using Instrumental Variable (IV) estimation. Furthermore, we find that the association between ESC scores and bilateral trade costs remains statistically significant and robust across all our specifications, whereas the association between trust and trade costs is less robust under some specifications. Overall, our results suggest that ESC scores capture a trade-cost channel rather than operating solely through preferences as suggested in earlier studies.
This paper examines whether the home-market effect (HME)-a foundational prediction of trade theory-applies to the global arms trade. Using bilateral weapons trade data from 1950 to 2007 and building on the framework of Costinot et al. (2019), we construct a country-year-specific composite demand proxy to test for the presence of HME in the weapons industry. Our baseline and robustness results consistently show no evidence of a home-market effect, either in its weak or strong form. Additional analyzes using alternative proxies, estimation methods, and data sources confirm this finding. However, we identify a weak HME during the Cold War period, suggesting structural differences before and after the dissolution of the Soviet Union. Further gravity estimations reveal that arms trade flows are shaped more by geopolitical factors-such as sanctions and alliances-than by domestic demand. Our findings highlight the unique nature of the global arms market compared to conventional industries.
