Household Heterogeneity and the Transmission of Foreign Shocks

Kurt Mitman, Sergio de Ferra and Federica Romei

No 14062, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study the role of heterogeneity in the transmission of foreign shocks. We build a Heterogeneous-Agent New-Keynesian Small Open Model Economy (HANKSOME) that experiences a current account reversal. Households' portfolio composition and the extent of foreign currency borrowing are key determinants of the magnitude of the contraction in consumption associated with a sudden stop in capital inflows. The contraction is more severe when households are leveraged and owe debt in foreign currency. In this setting, the revaluation of foreign debt causes a larger contraction in aggregate consumption when debt and leverage are concentrated among poorer households. Closing the output gap via an exchange-rate devaluation may therefore be detrimental to household welfare due to the heterogeneous impact of the foreign debt revaluation. Our HANKSOME framework can rationalize the observed "fear of floating" in emerging market economies, even in the absence of contractionary devaluations.

Keywords: Sudden stops; Foreign currency debt; Exchange rate policy; Incomplete markets (search for similar items in EconPapers)
JEL-codes: E21 F32 F41 (search for similar items in EconPapers)
Date: 2019-10
New Economics Papers: this item is included in nep-dge, nep-mac, nep-mon and nep-ore
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Household heterogeneity and the transmission of foreign shocks (2020)
Chapter: Household Heterogeneity and the Transmission of Foreign Shocks (2019)
Working Paper: Household Heterogeneity and the Transmission of Foreign Shocks (2019)
Working Paper: Household Heterogeneity and the Transmission of Foreign Shocks (2019)
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