We estimate the determinants of the ratings gap (the difference in credit ratings on domestic and foreign currency denominated sovereign issues) for three rating agencies and 108 countries. Fiscal and external sector policies matter importantly. We identify significant roles for the overall level of indebtedness, the current fiscal balance, the adequacy of foreign exchange reserves, and the foreign debt share in total debt. A pegged exchange rate and an open capital account both favor local currency issuance, as expected. In contrast, the impact of institutional variables is spotty and varies across rating agencies. We conclude that rating agencies pay closer attention to current policy than to institutional context when comparing the creditworthiness of domestic and foreign currency-denominated government bonds.

We link two global trends—AI and geoeconomic fragmentation—asking how fragmentation affects the international diffusion of AI, the magnitude of gains, and their distribution across economies. We ask these questions in general but also with a focus on the MENAP economies. While the effects of AI are potentially far-reaching, the benefits are neither guaranteed nor even. Frontier AI innovation is concentrated in a small number of economies, while countries benefiting through supply-chain participation or AI adoption—with outcomes shaped by their position in global trade and production networks and their AI preparedness. Geoeconomic fragmentation slows AI diffusion and reshapes its distribution by raising trade costs, restricting technology and data flows, fragmenting digital services, and reducing cross-border investment and collaboration. Yet proactive policy choices can turn this dynamic: economies that position themselves as connectors—maintaining trade and technology links across multiple partners—can potentially capture diverted flows and outperform even the no-fragmentation benchmark. For the MENAP economies, diversified links with all major technology hubs can cushion the effects of fragmentation and provide a structural foundation to emerge as net beneficiaries of AI diffusion, but realizing that potential requires reducing AI-related trade costs, improving AI preparedness, and building local AI-related capacity. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Is the US dollar entering the same decline cycle that ended past global currencies?

This paper examines the sustainability of government debt at provincial level in the People’s Republic of China (PRC) through the lens of Europe’s long experience with rule-based fiscal frameworks. Drawing on evidence from PRC province-level administrative divisions, European Union member states, and German Länder, it highlights common challenges in decentralized systems within currency unions: opaque liabilities, uneven fiscal capacity, political constraints, and enforcement issues. The analysis shows that while fiscal rules can support discipline, they must also avoid complexity, procyclicality, and loss of legitimacy. The paper argues for context-specific, adaptable debt-sustainability frameworks aligned with growth, revenue capacity, and spending responsibilities rather than arbitrary numerical thresholds.

Cultural trust biases (i.e., stereotypes) play an important role in shaping multinational banks' cross-border exposures. Exploiting a unique identification strategy and combining European regulatory data on banks' sovereign debt portfolios with existing and new surveys across 30 European countries, we show that multinational banks are more likely to lend to the government of a country when the residents of the countries where they operate exhibit more trust in the residents of that country. This result is robust to saturating our models with time-varying fixed effects at bank and country-pair levels, controlling for financial, informational, political and cultural linkages, and instrumenting trust via genetic and somatic similarities. Bank-level trust similarly drives corporate lending across borders and tilts banks' sovereign portfolios toward long-term maturities. Its role is amplified when governments are hit by salience shocks such as Eurozone crises and the Brexit referendum. As potential transmission channels of stereotypes from foreign bank branches to headquarters, we provide evidence consistent with culturally biased communication and internal transfers of human capital.

Scholars and politicians have expressed concern that immigrants from countries with low levels of political trust transfer those attitudes to their destination countries. Using large-scale survey data covering 38 countries and exploiting origin-country variation across different cohorts and survey rounds, we show that, to the contrary, immigrants more exposed to institutional corruption before migrating exhibit higher levels of political trust in their new country. Higher trust is observed for national political institutions only and does not carry over to other supra-national institutions and individuals. We report evidence that higher levels of political trust among immigrants persist, leading to greater electoral participation and political engagement in the long run. The impact of home-country corruption on political trust in the destination country is further amplified by large differences in levels of income and democracy between home and host countries, which serve to highlight the contrast in the two settings. It is lessened by exposure to media, a source of information about institutional quality. Finally, our extensive analyses indicate that self-selection into host countries based on trust is highly unlikely and the results hold even when focusing only on forced migrants who were unlikely to have been subject to selection.

We document some underappreciated aspects of the recent evolution of the international reserve system. These include the growing share of gold in global central bank reserves, the continuing emergence of nontraditional reserve currencies, and the stalling share of renminbi in reserves. These trends are consistent with our findings in our earlier papers. In addition we look to the future, pondering the potential implications of dollar-linked stablecoins, the expansion of the BRICS grouping of countries and their de- dollarization plans, the development of blockchain-based platforms such as Project mBridge for the direct exchange of central bank digital currencies, and questions about the dollar’s safe-haven status. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

We assemble an almost complete set of central bank statutes since 1800to assess the legal independence of central banking institutions. We usethese to extend existing indices of legal independence backward and for-ward in time. We document the trend toward increased independence post1980 as well as an earlier, more limited movement in the direction of en-hanced independence in the 1920s. We apply natural language processingto current statutes to corroborate our human-reader assessment. Usingmachine-learning methods, we quantify the extent to which topics in thosestatutes contribute to the independence measure based on our reading ofthe statutes. The topic with the largest positive contribution to explainingthe cross-country variation in central bank independence encompasses dis-closure, transparency, and reporting obligations. The topic with the largestnegative contribution covers regulatory powers over inter alia securitiesmarkets that complicate the central bank's mandate, make accountabilitymore complex, and render independence problematic.

We assemble an almost complete set of central bank statutes since 1800 to assess the legal independence of central banking institutions. We use these to extend existing indices of legal independence backward and forward in time. We document the trend toward increased independence post 1980 as well as an earlier, more limited movement in the direction of enhanced independence in the 1920s. We apply natural language processing to current statutes to corroborate our human-reader assessment. Using machine-learning methods, we quantify the extent to which topics in those statutes contribute to the independence measure based on our reading of the statutes. The topic with the largest positive contribution to explaining the cross-country variation in central bank independence encompasses disclosure, transparency, and reporting obligations. The topic with the largest negative contribution covers regulatory powers over inter alia securities markets that complicate the central bank's mandate, make accountability more complex, and render independence problematic.

It is widely assumed that the renminbi (RMB) cannot acquire a meaningful place in central bank reserve portfolios without full liberalization of China's capital account. We argue that the RMB can in fact develop into an international reserve currency in the absence of capital-account convertibility. Trade and investment links can drive use despite limited access to Chinese financial markets. But this route to currency internationalization requires policy support. China must provide access to RMB through loans and the People's Bank of China (PBoC) currency swaps. It must ensure the convertibility of RMB into US dollars in offshore markets. It must provide RMB services at a stable and predictable price. Currency internationalization without full capital-account liberalization thus requires the RMB to be backed by dollar reserves, which the PBoC consequently will continue to hold and use. Hence, we do not foresee RMB internationalization as supplanting dollar dominance.

Abstract Two sources of geopolitical tension – G7 sanctions on Russia and conflict between the United States and China – have the potential to reshape the global monetary system. This short paper argues that only the second is likely to have far-reaching, and heavily negative, consequences if allowed to develop further.

We assess India's inflation-targeting regime at the eight-year mark. The Reserve Bank of India continues to be a flexible inflation targeter: it responds to both the output gap and inflation when setting policy rates. It has become neither more hawkish nor more reactive with the transition to inflation-targeting. Evidence points to improved outcomes: inflation is lower and less volatile, inflation expectations are better anchored and the transmission of monetary policy is more effective. Given this record, radical changes such as broadening the RBI's monetary mandate, abandoning the target in favour of a more discretionary regime, targeting core instead of headline inflation or altering the target and tolerance band would be risky and counterproductive. One obvious area for improvement entails updating the weight of food prices in the CPI basket. We estimate the correct weight of food at today's per capita income to be closer to 40 per cent instead of the current 45.8 per cent. This would likely fall further to around 30 per cent in a decade from now due to the projected increase in per capita incomes. This correction should ameliorate concerns about the design and practice of the current inflation targeting regime.JEL Codes: E5, E52

Hyperglobalization is dead, but globalization is very much alive. It is being reshaped by loosening economic and financial links between the United States and China. The extent of their decoupling should not be exaggerated, however. The two economies remain deeply interdependent, and their interdependence is being preserved by a re-routing of trade and investment through third countries. Similarly, it is important not to exaggerate the impact on the international role of the dollar, if for no other reason that for the time being there is no viable alternative.

SUMMARY We test the predictions of recent theoretical studies of the impact of sanctions on the exchange rate. We build a database of exchange rates and sanctions spanning 1914–45 – an era when both large and small economies were targeted by multilateral sanction packages, facilitating comparisons with today’s Russian war episode. We estimate the dynamic response of the exchange rate in a panel of sanction episodes at weekly frequency using local projections, conditioning on the type of sanctions taken. We tease out mechanisms through which sanctions affect the exchange rate by estimating their effects on macroeconomic variables plausibly acting as transmission channels. Our estimates suggest that import restrictions, export restrictions, asset freezes and trade embargoes lead to exchange rate effects consistent with theory, though the precision of the measured effects varies across sanction type. These findings suggest that recent models of the effects of sanctions on the exchange rate do not just match developments in today’s specific Russia episode but have broader applicability. It follows that the direction of exchange rate movements is not an adequate metric of the success or failure of sanctions but a reflection of the type and scale of the measures taken.

What will be political legacy of the Coronavirus pandemic? We find that epidemic exposure in an individual's impressionable years (ages 18 to 25) has a persistent negative effect on confidence in political institutions and leaders. We find similar negative effects on confidence in public health systems, suggesting that the loss of confidence in political leadership and institutions is associated with healthcare related policies at the time of the epidemic. In line with this argument, our results are mostly driven by individuals who experienced epidemics under weak governments with less capacity to act against the epidemic, disappointing their citizens. We provide evidence of this mechanism by showing that weak governments took longer to introduce policy interventions in response to the COVID-19 outbreak. These results imply that the Coronavirus may leave behind a long-lasting political scar on the current young generation ("Generation Z").