Household Heterogeneity and the Transmission of Foreign Shocks

Sergio de Ferra, Kurt Mitman and Federica Romei

No 26402, NBER Working Papers from National Bureau of Economic Research, Inc

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

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 and nep-opm
Note: EFG IFM ME
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Published as Household Heterogeneity and the Transmission of Foreign Shocks , Sergio de Ferra, Kurt Mitman, Federica Romei. in NBER International Seminar on Macroeconomics 2019 , Forbes and Gourinchas. 2020
Published as Sergio de Ferra & Kurt Mitman & Federica Romei, 2020. "Household heterogeneity and the transmission of foreign shocks," Journal of International Economics, .

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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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