en Cody Kallen

Rising geopolitical tensions and supply chain vulnerabilities have driven recent fragmentation of foreign direct investment (FDI). This paper provides systematic evidence of FDI fragmentation along ideological and geographic lines across five dimensions: shifting away from ideologically distant countries (ideological sorting), prioritizing politically aligned countries (friendshoring), reducing exposure to specific high-risk countries (derisking), moving production closer to the home country (nearshoring), and returning investment to the home country (reshoring). Measures of FDI based on financial transactions reveal evidence of ideological sorting and nearshoring. The capital expenditures of multinational enterprises and their affiliates display ideological sorting, derisking, nearshoring, and reshoring. Cross-border M&A deals reflect patterns of derisking, while horizontal (but not vertical) M&A exhibits broader ideological realignment. At the industry level, derisking and ideological sorting appear widely distributed. By contrast, friendshoring and nearshoring of M&A remain concentrated in goods-producing sectors.]]> IFDP Paper Anushka Mitra and Aditi Singh

This paper examines which macroeconomic signals shape household expectations and finds that unemployment shocks play a more influential role than inflation shocks. Using daily data, we identify which announcements prompt households to revise their expectations. We construct two shock series—assuming households are either sophisticated or naive—based on the surprise components of announcements. Labor market news strongly influences both general economic sentiment and inflation expectations. Even when inflation rises and unemployment falls, households respond more to unemployment shocks. Most changes in inflation expectations are driven by labor market shocks. During negative supply and demand shocks, unemployment remains the dominant driver.]]> IFDP Paper Pablo Cuba-Borda, Albert Queralto, Ricardo Reyes-Heroles, and Mikaël Scaramucci

We study how trade cost shocks influence inflation. Using bilateral trade flows from detailed global input-output data and a gravity framework, we estimate trade cost shocks and their effects on CPI inflation. Higher trade costs for final goods cause large but short-lived inflation spikes, while increased costs for intermediate inputs trigger more persistent inflation. A multi-country model of inflation with trade in final goods and intermediate inputs replicates these patterns. We show that trade cost shocks and tariffs on imported inputs transmit through global value chains and worsen monetary policy trade-offs. We use the model to quantify the effects of trade costs during the 2018–2019 U.S.-China trade war and to estimate the contribution of trade costs during the post-pandemic inflation surge. Novel data on U.S. domestic sourcing shores allow us to estimate trade cost shocks for the U.S. using Bayesian methods.]]> IFDP Paper Harun Alp, Jeremy Pearce, and Marta Prato

This paper explores the symbiotic relationship between transformative entrepreneurs and inventors, which is crucial for economic growth. We utilize microdata from Denmark to demonstrate that while the relationship between IQ and general entrepreneurship tends to be negative, it is strongly positive among transformative entrepreneurs. Transformative entrepreneurs, often with higher IQ and education levels, significantly drive R&D and business growth, thereby providing substantial opportunities for inventors. In contrast, average entrepreneurs are more influenced by their family's entrepreneurship background. Our economic model links these dynamics to overall economic progress, highlighting how higher education influences career paths in entrepreneurship and invention. We identify talent misallocation caused by unequal education access, particularly affecting lower-income families. Our findings indicate the most effective policies strengthen the interplay between higher education, innovation, and entrepreneurship to foster transformative businesses and achieve long-run economic growth.]]> IFDP Paper Francesco Ferrante, Andrea Prestipino, Immo Schott

Long-term debt is the main source of firm-financing in the U.S. We show that accounting for debt maturity is crucial for understanding business cycle dynamics. We develop a macroeconomic model with defaultable long-term debt and equity adjustment costs. With long-term debt, firms have an incentive to increase leverage in order to dilute the value of outstanding debt. When equity issuance is costly, this incentive helps firms raise more debt through a debt dilution channel and mitigates the decline in net worth through a balance sheet channel, dampening the decline in investment in response to a negative financial shock. Using firm-level data, we estimate equity issuance costs and incorporate our findings into an estimated medium-scale DSGE model. Accounting for debt maturity and the cost of equity financing implies that credit supply shocks are the primary drivers of business cycle fluctuations.]]> IFDP Paper Florencia Airaudo, Francois De Soyres, Keith Richards, and Ana Maria Santacreu

Recent geopolitical tensions have revived interest in understanding the economic consequences of geopolitical fragmentation. Using bilateral trade flows, portfolio investment data, and detailed records of economic policy interventions, we revisit widely-used geopolitical distance metrics, specifically the Ideal Point Distance (IPD) derived from United Nations General Assembly voting. We document substantial variability in measured fragmentation, driven significantly by methodological choices related to sample periods and vote categories, especially in the wake of Russia’s 2022 invasion of Ukraine. Our results show robust evidence of increasing fragmentation in both trade flows and economic policy interventions among geopolitically distant country pairs, with particularly strong effects observed in strategically important sectors and policy motives. In contrast, financial portfolio allocations exhibit weaker, more heterogeneous, and context-sensitive responses. These findings highlight the critical importance of methodological transparency and careful specification when assessing geopolitical realignments and their implications for international economic relations.]]> IFDP Paper Dario Caldara, Matteo Iacoviello, and David Yu

This paper introduces a monthly shortage index spanning 1900 to the present, constructed from 25 million newspaper articles. The index captures shortages across industry, labor, food, and energy, and spikes during economic crises and wars. We validate the index and show that it provides information beyond traditional macroeconomic indicators. Using predictive regressions, we find that shortages are associated with persistently high inflation and lower economic activity. A structural VAR model reveals that, compared to a traditional supply shock, surprise movements in shortages produce less inflation relative to their GDP impact, suggesting that shortages are associated with constraints on price adjustment that limit inflation but magnify the decline in real activity. We also show that post-pandemic shortages and inflation were primarily driven by supply forces, with demand factors playing a less important role.]]> IFDP Paper Ricardo Correa, Bernardo Morais, Jessica Roldán and Claudia Ruiz-Ortega

We study how banks’ exposure to a large set of related and suddenly-distressed borrowers impacts their commercial lending and risk taking. Using Mexican credit registry data, we examine the effect of the 2014 collapse in energy prices. After this shock, energy-exposed banks—regardless of their ex-ante financial health—raise further their exposure to the energy sector by expanding lending at looser credit terms to borrowers with higher expected losses, while recapitalizing through retained earnings. The shock is transmitted to non-energy firms—despite price controls on retail-energy products—via a contraction in bank lending, especially to bank-dependent borrowers.]]> IFDP Paper Matteo Iacoviello, Ricardo Nunes, and Andrea Prestipino

We study optimal credit market policy in a stochastic, quantitative, general equilibrium, infinite-horizon economy with collateral constraints tied to housing prices. Collateral constraints yield a competitive equilibrium that is Pareto inefficient. Taxing housing in good states and subsidizing it in recessions leads to a Pareto-improving allocation for borrowers and savers. Quantitatively, the welfare gains afforded by the optimal tax are significant. The optimal tax reduces the covariance of collateral prices with consumption, and, by doing so, it increases asset prices on average, thus providing welfare gains both in steady state and around it. We also show that the welfare gains stem from mopping up after the crash rather than a pure ex-ante macroprudential aspect, aligning with prior research that emphasizes the importance of ex-post measures compared to preventive policies alone.]]> IFDP Paper Justin R. Pierce, Georg Schaur, and Peter K. Schott

Heise et al. (2021) develop a model-based empirical measure—sellers per shipment (SPS)—to characterize how firms organize supply chains in response to a quality control problem. High SPS indicates spot-market purchasing with costly inspections, while low SPS suggests long-term relationships where buyers pay an incentive premium to prevent cheating. Here, we document intuitive variation in US importers' SPS across sectors, and that show shipping characteristics such as average price, quantity shipped and shipment frequency are in each sector consistent with the model of sourcing developed in Heise et al. (2021), providing further confidence in the measure.]]> IFDP Paper Ruth Judson

The incidence of currency counterfeiting and the possible total stock of counterfeits in circulation are popular topics of speculation and discussion in the press and are of substantial practical interest to the Federal Reserve, the U.S. Treasury and the United States Secret Service (USSS), who are jointly responsible for U.S. banknote design, including security features, and production. This paper assembles data from Federal Reserve and USSS sources and presents a range of estimates for the number of counterfeits in circulation in the United States. In addition, the paper presents figures on counterfeit passing activity by denomination, location, and counterfeit type.]]> IFDP Paper Viktors Stebunovs, Előd Takáts, and Judit Temesvary

We use bilateral cross-border bank claims by nationality to assess the effects of geopolitics on cross-border bank flows. We show that a rise in geopolitical tensions between countries — disagreements in UN voting, broad sanctions, or sentiments captured by geopolitical risk indices — significantly dampens cross-border bank lending. Elevated geopolitical tensions also amplify the international transmission of monetary policies of major central banks, especially when geopolitical tensions coincide with monetary policy tightening. Overall, our results suggest that geopolitics is roughly as important as monetary policy in driving cross-border lending.]]> IFDP Paper Immo Schott

We provide novel empirical evidence that firms’ investment is more responsive to monetary policy when a higher fraction of their debt matures. In a heterogeneous firm New Keynesian model with financial frictions and endogenous debt maturity, two channels explain this finding: (1.) Firms with more maturing debt have larger roll-over needs and are therefore more exposed to fluctuations in the real interest rate (roll-over risk). (2.) These firms also have higher default risk and therefore react more strongly to changes in the real burden of outstanding nominal debt (debt overhang). Unconventional monetary policy, which operates through long-term interest rates, has larger effects on debt maturity but smaller effects on output and inflation than conventional monetary policy.]]> IFDP Paper Mohammad R. Jahan-Parvar, Yuriy Kitsul, Jamil Rahman, and Beth Anne Wilson

We document that foreign economic policy uncertainty (EPU^F) has significant incremental predictive power for excess U.S. stock returns in the presence of domestic EPU, both in aggregate and for returns of portfolios constructed on firm characteristics, for 6 to 12-months-ahead horizons. We find that EPU^F shocks primarily transmit to equity prices through cash flow news rather than the discount rate news channel. We examine whether responses of select macro-financial variables to an adverse EPU^F shock are consistent with this transmission mechanism. Corporate investment outlays, payouts, and aggregate credit demand decline in response to such a shock.]]> IFDP Paper Judit Temesvary

We use a rarely accessed BIS database on bilateral cross-border bank claims by bank nationality to examine the interaction of monetary and fiscal policies. We find significant interactions: the transmission of the monetary policies of major currency issuers is significantly influenced by the fiscal stance of source (home) lending banking systems. Fiscal consolidation in a source country amplifies the effect of currency issuers' monetary policy on lending. For instance, a reduction in the German debt-to-GDP ratio amplifies the negative impact of US monetary policy tightening on USD-denominated cross-border bank lending outflows from German banks. The interaction effects are the strongest for US monetary policy.]]> IFDP Paper