Dear friends of the International and Monetary Economics Network
Our network is growing rapidly. If you would like to share this newsletter, new readers can subscribe HERE. You can also follow us on LinkedIn and other social media channels. Overall, we now reach more than 60,000 subscribers and followers. You can also join a growing number of active supporters on Substack. We will further expand our activities and contributions to debates on international economics, monetary policy, and related topics. We are always open to collaborations. Please feel free to contact us.
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On May 27, we enjoyed an insightful webinar with Ezra Karger (Federal Reserve Bank of Chicago, Forecasting Research Institute) on „Forecasting the Economic Effects of AI„.
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In our webinars and in-person events, members of the network or guests are invited to present. If you are interested, please contact us or fill out this form. We welcome high-quality presentations by senior and junior economists from academic, finance, or policy-oriented backgrounds. High-quality projects that present bold new ideas are always welcome.
Webinar: The Macroeconomic Effects of AI Uncertainty (Juan Reyes, King’s College London, Economic Statistics Centre of Excellence)
- June 9, 2026, 16:00 – 17:00 Central European Summer Time
Registration HERE
Link to paper
Juan Reyes (King’s College London, Economic Statistics Centre of Excellence) examines the macroeconomic implications of uncertainty shocks related to artificial intelligence (AI) through a novel text-based AI Uncertainty (AIU) Index. His results indicate that an increase in AI uncertainty generates contractionary effects concentrated in equity prices, wages, and hours worked. In addition, the findings characterise AI uncertainty as a distinct macroeconomic shock whose effects concentrate in wage compression and intensive-margin labour adjustment.
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Webinar: GDP-Flash Estimates: An International Assessment (Philipp Wegmüller, State Secretariat for Economic Affairs, Switzerland)
- June 18, 12:00 – 13:00 Central European Summer Time
Registration HERE
Philipp Wegmüller is deputy head of the forecasting unit of the State Secretariat for Economic Affairs, Switzerland. He has a Ph.D. from the Department of Economics at the University of Bern and a Master’s degree in International and Monetary Economics.
Abstract of the paper: „We compile a harmonised real-time vintage dataset of quarterly GDP releases for 12 countries as well as the European Union and euro area aggregates, and evaluate the quality of flash estimates relative to later releases and more mature benchmarks. We document substantial cross-country heterogeneity in revision behaviour, with revision magnitudes increasing markedly during periods of elevated volatility. We further show that revision-aware state-space methods can, in some settings and depending on the evaluation benchmark, improve upon the raw flash release as an approximation to more mature GDP growth. Overall, the results highlight the trade-off between timeliness and precision in early national-accounts data and show that the real-time reliability of flash GDP depends importantly on benchmark choice, revision dynamics, and national compilation practices.“————————————————
Edmund Phelps, RIP
A giant of macroeconomics has left us.
In his book, „My Journeys in Economic Theory,“ Edmund Phelps „tells the story of his role in reshaping economic theory, offering a powerful personal account of a creative and rewarding career.“
„At its core, this book shares the joy of intellectual achievement: the excitement of coming up with a new idea that radically departs from prevailing views and the satisfaction of exercising one’s own ingenuity instead of applying or developing others’ models. Telling the story of a life packed with intellectual adventure, My Journeys in Economic Theory provides a profound vision of a dynamic, modern economy that offers lives rich with creativity and meaning.“
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US Economy: In the first quarter of 2026, the United States economy grew by an annualized 1.6 percent, roughly in line with expectations. Glad to see that our IMEN nowcast (1.7 percent) came quite close to the official reading.
Particularly noteworthy is the solid growth in business investment. Investments related to AI are likely to have been a key contributing factor. Private consumption grew at a solid pace, supported in part by tax refunds. Private consumption is unlikely to serve as a strong growth driver in coming months. Higher inflation (driven primarily by fuel prices) is weighing on demand. A particularly close look should be taken at the personal saving rate of U.S. households, which has decreased. Despite higher inflation, private consumption remains solid because people are saving less. It is obvious that this can only work temporarily.
Currently, various nowcasts point to a continued solid expansion of the U.S. economy. 
U.S. labor market: Strong figures for May were released by the Bureau of Labor Statistics. The economy added 172,000 jobs, while unemployment remained low at 4.3 percent. In addition, the figures for March and April were revised upward, painting a brighter picture of labor market developments in the spring. Most new jobs were created in the service sector.
How strong is the U.S. economy? More nowcasts and indicators can be found HERE.
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Central bank meetings in June
Central banks globally are facing a challenging position due to high inflation and subdued economic growth. The Fed, the SNB, and the BoE are expected to keep interest rates constant in June. Our network currently assigns the highest probability of a rate hike to the ECB and the BoJ.
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The situation in the Middle East made the macroeconomic outlook highly uncertain. In our Global Economy Flash June 2026, we outline our perspective on the global macroeconomy. The IMEN forecast for global GDP growth in 2026 is 2.8 percent. The world economy has shown resilience amid headwinds, but the dampening effects of high oil prices, supply chain stress, geopolitical uncertainty, and potential food shortages are considerable. We also stress that „inflation in the United States and other countries has been elevated for several years, which could structurally raise inflation expectations.“
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IMEN Treasure Trove – What Caught Our Eye (Selection): Supply shocks and monetary policy, multinationals and knowledge diffusion, and much more…
Highly relevant!
„The Central Bank’s Dilemma: Look Through Supply Shocks or Control Inflation Expectations?“ by Paul Beaudry, Thomas J Carter, and Amartya Lahiri.
„When countries are hit by supply shocks, central banks often face the dilemma of either looking through such shocks or reacting to them to ensure that inflation expectations remain anchored. In this paper, we propose a tractable framework to capture this dilemma and explore optimal policy under various assumptions on how agents form their expectations and the sophistication with which those expectations account for the central bank’s announced policies. While our analysis covers a wide range of potential specifications, our baseline results focus on level-k thinking (LKT) – a form of bounded rationality that enjoys significant support in the experimental literature and encompasses both adaptive expectations (AE) and rational expectations (RE) as special cases. Nonetheless, we show that the optimal policy under LKT is qualitatively very different from its analogues under AE and RE, exhibiting abrupt pivots in the policy stance. In particular, it is optimal for the central bank to initially look through supply shocks until a threshold is reached, then pivot discontinuously to a more hawkish anti-inflationary stance. We find that such pivots can, if optimally executed, be compatible with soft landings in the sense that most (or even all) of the reduction in inflation occurs through re-anchoring of expectations rather than economic slack. We also discuss risks and why policy errors in terms of tightening too late or too slowly can be especially costly in such an environment.“
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Thought-provoking!
„The Art of Monetary Policy“ by Kristin J. Forbes (Karl Brunner Distinguished Lecture Series).
„When central banks were forced to innovate and develop a multifaceted set of new weapons in response to the 2008 global financial crisis and 2020 COVID-19 pandemic, the result was a substantial expansion in their authority and reach. In The Art of Monetary Policy, Kristin Forbes draws lessons for monetary policy of the last two decades from the principles of Sun Tzu, the author of The Art of War, a Chinese philosopher and military strategist from the fifth century BC. Tzu proposed several key principles for success—tenets that apply to monetary policy and the battlefield today: (1) plan in advance for the next battle; (2) accept and adapt to the inevitability of powerful, external shocks outside your control; (3) establish a strong tactical position; (4) develop a variety of weapons that can be combined for different maneuvers and situations; (5) maintain flexibility so that you can quickly modify your strategy; and (6) consider the longer-term costs when evaluating the trade-offs of different approaches. These principles provide insights into what central banks did (and did not) do well over the last two decades, as well as how they should deploy interest rates, balance sheets, emergency support programs, forward guidance, and macroprudential tools in the future.“
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Super interesting!
„How should central banks respond to commodity price shocks? Optimal monetary and exchange rate frameworks for commodity-exposed economies“ by Thomas Drechsel, Michael McLeay, Silvana Tenreyro, and Enrico D. Turri.
„This paper shows that the optimal monetary policy and exchange rate framework depend critically on the economy’s commodity exposure. We develop a flexible but tractable model economy with commodity exports and imports, in which international financial conditions may vary with the commodity cycle. Stabilizing domestic prices is optimal for commodity exporters, in line with standard open-economy policy prescriptions. But for economies that use commodities as inputs in production, optimal policy largely ‘looks through’ the direct and indirect effects of commodity shocks on domestic prices; this contrasts with some earlier findings and policy practice (which only ‘looks through’ the direct effect). Exchange-rate pegs or strict CPI inflation targeting perform better for commodity importers because they stabilize wages and employment, though neither policy is robustly optimal. In emerging and developing economies, where financial conditions are more tied to the commodity cycle, trade-offs are starker and implementing the optimal policy may be challenging, since it requires enough credibility to keep inflation expectations anchored amidst greater volatility in some nominal variables.“
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Highly relevant!
„How to Win a Trade War: An Optimistic Guide to an Anxious Global Economy“ by Soumaya Keynes and Chad Bown.
„We used to take trade for granted. Trillions of dollars of goods and services crossed borders each year, made possible by a global, rules-based system. Nobody paid too much attention to supply chains: they just worked. Keynes and Bown argue that the rules of the game have been abandoned, and a different strategy is needed. Yearning for the old approach to start working again isn’t an option. Countries must adapt, which means learning from history, economics, and from each other—including China. The stakes couldn’t be higher.“
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Food for thought!
„Gold’s Grim Message“ by Barry Eichengreen.
„Central banks’ purchases and repatriation of gold are on the rise, and both should be viewed as a symptom of deglobalization. They signal the advent of a more geopolitically fragmented world in which cross-border transactions of all kinds are poised to become more difficult and costly.“
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Highly relevant!
„The credibility of bail-in“ by Alessandro Di Stefano, Yvan Lengwiler, and Kumar Rishabh.
„The resolution framework for global systemically important banks has been over a decade in the making. The failure of Credit Suisse (CS) in March 2023 was its first major test. Authorities had a resolution plan in place but chose a different path amid financial stability concerns. They facilitated a takeover of CS by UBS, backed by public guarantees. Additional Tier 1 (AT1) bonds were written down in full; bail-in creditors, who would bear losses next under resolution, were left whole. We study how this episode reshaped bail-in credibility across Europe. Using bond-level data from 94 banks in 22 countries, we trace the repricing of AT1, bail-in, and senior debt over the subsequent year. AT1 spreads moved in line with jurisdiction-specific reg ulatory signals, while bail-in spreads and credit default swap subordination premia narrowed across the board, consistent with markets assigning a lower probability to bail-in. Lower-rated banks saw larger spread declines, and investor responsiveness to firm-specific disclosures fell, pointing to reduced market discipline. This evidence suggests the CS episode weakened bail-in credibility.“
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Highly relevant!
„Cheapflation Cycles“ by Kunal Sangani.
„We document a new source of fluctuations in inflation inequality. When the cost of upstream inputs rises, varieties within a product category tend to have similar absolute price increases. However, the same absolute price increase constitutes a larger percentage change for low-price products, resulting in excess inflation at the low end (“cheapflation”). Since low-income households tend to buy lower-priced varieties, the inflation rates they face are disproportionately sensitive to upstream costs. Using data on food-at-home purchases, we show that this mechanism generates cycles in inflation inequality and excessive volatility in inflation for low-income households relative to high-income households. This channel parsimoniously accounts for observed fluctuations in inflation inequality over time, including surges in cheapflation and inflation inequality during both the Great Recession and the 2021–2023 post-pandemic inflation. Official statistics mask these within-category differences in inflation and thus understate the differences in inflation experienced by low- and high-income households by 70–90 percent. We provide evidence that this mechanism applies to a range of consumption categories beyond food at home. The same mechanism also leads to systematic differences in inflation across cities and import price inflation across countries in response to nationwide and global cost shocks.“
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Highly relevant!
„Digital Money“ by Stephen Cecchetti, Dirk Niepelt, Hélène Rey, and Xavier Vives.
„Cash is disappearing from daily payments, private digital liabilities are expanding domestically and internationally, and public authorities are reevaluating the role of sovereign money. The report shifts attention from technological novelty to the institutional arrangements that make money reliable. Its central argument is that the most important questions raised by digital money concern the architecture of the monetary system: who creates money and under what safeguards, how liquidity is preserved during periods of stress, and how the rents and risks associated with money creation are distributed between public and private entities. It examines the social value of private money creation and the need for a central bank digital currency; the implications of cryptocurrencies and stablecoins for the international monetary system and their macroeconomic effects; and the regulatory approach to digital currencies and tokenisation.“
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Very valuable!
„Tracing the History of Asset Price Bubble Theory: A Literature Review“ by Sally Dubach.
„The literature on rational asset price bubbles has grown substantially, yet its internal logic is difficult to trace without reading across a large and technically demanding body of work. This paper provides a guide to the literature on rational asset price bubble theory, tracing its evolution from early overlapping generations models to environments with financial frictions, infinitely lived agents, and dividend-paying assets. Two mechanisms consistently sustain rational bubbles across these frameworks. The first is resale: investors buy above fundamental value, expecting to sell to subsequent buyers. The second is savings pressure that pushes the bubbleless equilibrium interest rate below the economy’s growth rate. Despite substantial theoretical progress, a gap remains between theoretical insights and the frameworks policymakers need.“
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Highly relevant!
„Friend, Not Foe? Monetary Policy and Energy Prices“ by Gökhan Ider, Alexander Kriwoluzky, Frederik Kurcz, and Ben Schumann.
„A central bank’s ability to influence energy prices fundamentally shapes both monetary policy transmission and mandate-optimal policy design. Using euro area data, we show that European monetary policy shocks significantly lower global energy prices, amplifying and accelerating the transmission to headline inflation and inflation expectations because energy prices adjust more rapidly than other consumer prices. …The ability to affect energy prices materially alters the mandate-optimal policy response, requiring more moderate tightening and delivering a more favorable inflation–output allocation. Absent this ability, stabilizing inflation requires substantially stronger tightening at significantly higher output costs. Consequently, standard frameworks treating energy prices as exogenous therefore mischaracterize both the transmission and the mandate-optimal policy response of monetary policy to energy price shocks. Accounting for their endogenous response reveals that central banks may have more leverage over energy-driven inflation than previously thought.“
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Food for thought!
„Speculative-Growth and the AI “Bubble”“ by Ricardo J. Caballero.
„AI technology can generate speculative-growth equilibria. These equilibria are rational but fragile: elevated valuations support rapid capital accumulation, yet persist only as long as beliefs remain coordinated. The key force is a funding feedback—a saving-rate channel through which AI-driven redistribution toward capitalists lowers the required return. As AI capital performs tasks previously done by labor, the labor share falls and capitalist wealth rises. Because capitalists have a higher propensity to save, this wealth shift raises aggregate saving and helps validate the high valuations that support rapid investment. The task-based structure of AI also sustains the return to AI capital over a wider range of accumulation. Building on Caballero et al. (2006), the paper shows that these linked effects can produce multiple equilibria and a speculative transition toward a high-capital equilibrium. Interest rates remain elevated early in that transition, relative to their eventual low steady-state level, and fall sharply only later. At the same time, the equilibrium is fragile: a loss of confidence can precipitate a self-fulfilling crash and reversal. Higher AI productivity can make the high-capital outcome the unique equilibrium, while upward shifts in the funding schedule or faster obsolescence can eliminate the high-capital steady state entirely.“
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Really cool!
„The Monetary Policy Statement Database“ by Cory Baird, Jonathan Benchimol, Vira Vyshnevska, Wook Sohn, and Iegor Vyshnevskyi.
The Monetary Policy Statement Database „provides a standardized, machine-readable dataset of policy statements from major central banks worldwide – built for research on communication trends, inflation dynamics, and global monetary policy transmission.“
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Highly relevant!
„The Battle over Knowledge: Multinationals, Diffusion, and Governance“ by Laura Alfaro, Maggie X. Chen, and Beata S. Javorcik.
„Multinational corporations (MNCs) are the dominant institutions for creating and distributing knowledge across borders. Their activities generate geopolitical externalities when cross-border knowledge spillovers enhance a rival state’s strategic capabilities in ways neither internalized by firms nor priced by markets. This review examines MNC-mediated knowledge creation and diffusion and the governance regime that has emerged in response. We distinguish three types of knowledge — codified, tacit, and organizational — that differ in their transmission channels and governability, and trace how each is created within MNC networks, diffused within and across firm boundaries, and targeted by policy instruments…Linking the theory of the multinational firm to the economics of geopolitical rivalry, the review highlights the trade-offs that knowledge governance imposes on the global economy.“
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Really cool!
“Deep Learning for Solving and Estimating Dynamic Models in Economics and Finance“ by Simon Scheidegger.
“Deep learning for the recursive, stochastic, high-dimensional dynamic models that economists actually solve, with all materials open source, runnable, and self-contained.”
“Modern macroeconomics, finance, and climate economics have outgrown the grid-based numerical methods that dominated a generation ago. Once you add heterogeneous agents, overlapping generations, occasionally binding constraints, continuous-time dynamics, or coupled climate-economic interactions, the state space becomes too large for tensor-product grids and classical methods (projection, value-function iteration, perturbation) break down. If you are trying to solve models with ten or more state dimensions, estimate them, or design policy under parameter uncertainty, you need a different toolbox.”
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We are always open to collaborations. Please feel free to contact us.
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