Importing Aggregate Demand

Chen Lian, Dmitry Mukhin and Christian Wolf

No 21649, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: How exposed are open economies to global demand shocks? In equilibrium, foreign booms can be absorbed either by domestic consumption ("quantities") or by real exchange rate appreciation ("prices"). We show that failures of Ricardian equivalence and global financial market imperfections, two frictions popular in much recent work, have opposite effects on the split: while elevated marginal propensities to consume push towards quantities, financial frictions instead increase price adjustment. As the flexible-price equilibrium generally features a mix of quantity and price responses, policy needs to be contractionary to achieve flexible-price outcomes if the spending effect dominates, and vice-versa if financial frictions are severe. In our quantitative explorations the spending effect tends to win the race, necessitating aggressive domestic policy action.

Date: 2026-06
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP21649 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:21649

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP21649

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().