We evaluate the spillover effects of debt-financed fiscal policy interventions of the United States on other economies using a two-country DSGE model with international portfolio rebalancing effects.

US fiscal expansions financed by long-term debt issuance would, on net, hinder economic activity in the rest of the world (ROW) despite the standard trade channel’s net positive effect on the ROW economy. The fall in ROW output occurs mainly due to the increase in the ROW term premia and long-term rates through the portfolio rebalancing channel.

Testing the predictions of our theoretical model by using panel regressions and vector autoregressions, we find empirical support for the trade and portfolio balance channels of fiscal spillovers and for the negative relationship between ROW output and US fiscal policy shock.

What are the cross-border spillovers from major economies' quantitative easing policies to their trading partners? We provide evidence by concentrating on spillovers from the US to Canada during the ZLB period when QE policies were actively used. 

We identify QE shocks in the US and estimate their impact on a large number of Canadian macroeconomic and financial variables. Then we analyze the transmission channels of foreign QE shocks to the domestic economy. 

US QE shocks are expansionary for Canada despite a currency appreciation. This is because they spill over to domestic borrowing costs, lowering long-term rates as well as financial premiums, and increasing asset prices. We find evidence for both portfolio balance and risk channels.

This paper explores the optimal allocation of government bond purchases within a monetary union, using a two-region DSGE model, where regions are asymmetric with respect to economic size and portfolio characteristics: the extent of substitutability between assets of different maturity and origin, asset home bias, and steady-state levels of government debt 

By calibrating the model to the euro area, we show that optimal QE favors purchases from the smaller region (Periphery instead of Core), given that the former faces stronger portfolio frictions.

A fully optimal policy consisting of both the short-term interest rate and QE lifts the monetary union away from the zero lower bound faster than an optimal interest rate policy alone, which entails forward guidance. 

We evaluate international spillover effects of QE policies using an estimated two-country New-Keynesian model with portfolio balance effects

We show that QE in the US lowers long-term yields and stimulates economic activity not only in the US, but also in the rest of the world (ROW).

This occurs despite the currency appreciation in the ROW and the resulting deterioration in their trade balance. The key for this result is the decline in the ROW term premia through the portfolio balance channel, as the relative demand for ROW long-term bonds increases following QE in the US.

Hours worked per worker varies over the cycle for many emerging-market economies. In addition, both employment and hours worked per worker are positively correlated with each other and with output. 

A search-theoretic small open-economy model with intensive and extensive margins of labour requires a small wealth effect to explain these regularities at the expense of a smaller wage response. 

On the other hand, introducing financial friction in the form of a working capital requirement can explain the observed movements of labor market variables as well as other distinguishable business cycle characteristics of emerging economies. These include highly volatile and cyclical real wages, labor share, and consumption. 

We evaluate the effects of large-scale stock and bond purchases by a central bank using an estimated DSGE model with portfolio rebalancing effects. Portfolio rebalancing effects arise from imperfect substitutability between stocks and short- and long-term government bonds in mutual funds' portfolios.

The central bank's stock purchases would lower the risk and term premiums on stocks and long-term bonds, respectively, and thereby stimulate economic activity.

Since stocks comprise a larger share of asset portfolios, the effects of stock purchases on aggregate demand are slightly larger than similar-sized bond purchases.

Using a structural VAR model, we examine the contribution of six supply factors to the US headline inflation since the pandemic: labor supply, labor productivity, global supply chain, oil price, price mark-up and wage mark-up shocks. 

Our shock identification relies mainly on sign restrictions. But for the global supply chain shock, we propose a new identification scheme combining sign, narrative and variance decomposition restrictions. 

Global supply chain and oil price shocks are the biggest supply contributors to the US inflation during the pandemic. In contrast, labor shortages have only a mild contribution to inflation, but their impact on output is larger in that period. Additionally, price and wage mark-up shocks start to significantly contribute to inflation only towards the middle of 2022.

This paper studies the effects of foreign exchange (FX) interventions in a two-region New Keynesian model where governments issue both short-term and long-term bonds. Imperfect substitutability between bonds gives rise to portfolio balance effects that make FX interventions effective. 

FX interventions do not have standard “beggar-thy-neighbor” consequences in our model. Interventions in short-term bonds lead to lower GDP in both regions, while interventions in long-term bonds lead to higher GDP in both regions. 

These results are driven by the impact of the interventions on the term premium channel, which dominates the trade balance channel.

This paper compares the effectiveness of QE policies in small versus large economies using an international portfolio balancing model with country size.

A QE policy in smaller economies has a weaker effect on term premium, implying a smaller effect on domestic demand. On the other hand, the exchange rate channel is stronger, bringing the overall stimulatory effects of the policy closer to those in large economies.

The strong exchange rate channel is due to i) high substitution estimated between domestic and foreign bonds especially at longer maturities and ii) high trade openness in smaller economies.

Labour share is more volatile in emerging markets and is procyclical, especially in countries facing countercyclical interest rates. In contrast, labour share in developed markets is more stable and slightly countercyclical.  

I show that an SOE-RBC model with working capital requirements can predict the right sign of the co-movement between labour share and output in both country groups, and can partly be responsible for the volatility of labour share. 

Moreover, imperfect financial markets in the form of credit restrictions not only amplify the results for the variability of labour share but also help better explain some of the striking business cycle regularities in emerging markets, such as highly volatile consumption, strongly procyclical investment and countercyclical net exports.