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Foreign currency debt is considered a source of financial instability in emerging markets. We propose a theory in which liability dollarization arises from an insurance motive of domestic savers. Since financial crises are associated to depreciations, savers ask for a risk premium when saving in local currency. This force makes domestic currency debt expensive, and incentivizes borrowers to issue foreign currency debt. Providing ex post support to borrowers can alleviate the effect of the crisis on savers’ income, lowering their demand for insurance, and, surprisingly, it can reduce ex ante incentives to borrow in foreign currency.

A salient characteristic of sovereign defaults is that they are typically accompanied by large devaluations. This paper presents new evidence of this empirical regularity known as the Twin Ds and proposes a model that rationalizes it as an optimal policy outcome. The model combines limited enforcement of debt contracts and downward nominal wage rigidity. Under optimal policy, default is shown to occur during contractions. The role of default is to free up resources for domestic absorption, and the role of exchange rate devaluation is to lower the real value of wages, thereby reducing involuntary unemployment.

The COVID-19 pandemic induces the worst economic downturn since the Second World War, requiring governments to design large-scale recovery plans to overcome this crisis. This paper quantitatively assesses the potential of government investments in eco-friendly construction projects to boost the economy and simultaneously realise environmental gains through reduced energy consumption and related greenhouse gas emissions. The analysis uses a Computable General Equilibrium model that examines the macroeconomic impact of the COVID-19 crisis in a small open economy (Belgium). Subsequently, the impact of the proposed policy is assessed through comparative analysis for macroeconomic parameters as well as CO2 equivalent emissions for four scenarios. Our findings demonstrate that the COVID-19 pandemic damages economies considerably, however, the reduction in emissions is less than proportionate. Still, well-designed public policies can reverse this trend, achieving both economic growth and a disproportionally large decrease in emissions. Moreover, the positive effect of such a decoupling policy on GDP is even stronger during the pandemic than compared to the pre-COVID-19 period. This is the result of a targeted, investment-induced green transition towards low energy-intensive economic activities. Finally, this paper describes how the net effect on the government budget is positive through the indirect gains of the economic uptake.

We study the gains from increased wage flexibility using a small open economy model with staggered price and wage setting. Two results stand out: (i) the effectiveness of labor cost reductions as a means to stimulate employment is much smaller in a currency union, and (ii) an increase in wage flexibility often reduces welfare, more likely so in an economy that is part of a currency union or with an exchange-rate-focused monetary policy. Our findings call into question the common view that wage flexibility is particularly desirable in a currency union.

This study investigates the relationship between oil price shocks and economic growth in a small open economy which is also a prominent oil-exporting economy. The research employs annual time series data from 1996 to 2022 and error correction method (ECM) to analyze the impact of variations in oil prices on Nigeria’s economic performance. The study unraveled the nuanced mechanisms driving the interaction between oil price volatility and economic performance in our case, small open economy, Nigeria. In addition, the research explores the mechanisms through which oil price shocks transmit to the broader economy, considering factors such as government policies, institutional frameworks, and the structure of Nigeria’s oil-dependent economy. Findings revealed that in the short-run as well as long-run, oil price volatilities, investments, and oil revenues have a negative effect on economic growth. Indeed investments, whether lagged by 1-year or not lagged at all, has a negative effect on economic growth in Nigeria. The study will equip policymakers and other stakeholders’ valuable knowledge to formulate more robust policies aimed at mitigating the adverse impacts of oil price volatility on Nigeria’s economic growth prospects and foster sustainable economic development strategy in Nigeria.

The paper considers a standard New Keynesian model of a small open economy with nominal rigidities and studies optimal capital controls. Consistent with the Mundellian view, it finds that the exchange rate regime is key. However, in contrast with the Mundellian view, the paper finds that capital controls are desirable even when the exchange rate is flexible. Optimal capital controls lean against the wind and help smooth out capital flows.

I consider a small open economy model where international financial markets are imperfect and the exchange rate is determined by capital flows. I use this framework to study the effects of portfolio flow shocks, derive the optimal foreign exchange intervention policy, and characterize its interaction with monetary policy. I derive the optimal intervention rule in closed form as a function of three implicit targets. Finally, using Swiss data, I estimate the model to quantify the inefficiencies generated by capital flow shocks and the optimal size of the intervention.

This study contributes to the ongoing debate on the consequences of expansionary fiscal policy by evaluating the macroeconomic effects of various fiscal policy options in a small open economy using a dynamic stochastic general equilibrium (DSGE) model. In addition, the study emphasizes the importance of studying Mongolia, which has unique characteristics and exhibits significant research gaps regarding its fiscal policy. The general architecture of the selected DSGE model includes different types of firms and households, commodity sectors, natural resource funds, and abundant fiscal tools regarding both expenditure and revenue. Employing numerous types of fiscal policy shocks, this study reveals that an exogenous increase in government investment yields the most significant long-term economic benefits, boosting potential output by 0.3%. Among the policy options, government transfers are the least effective in promoting economic output, and existing transfer policies in Mongolia appear to exert only a modest impact on growth, instead primarily contributing to the redistribution of resources. Finally, the estimated output multipliers (except transfers) are greater than one, implying that fiscal policy instruments may be an effective tool for managing the economy in Mongolia.