Inequality and optimal monetary policy in the open economy

Sushant Acharya and Edouard Challe

Journal of International Economics, 2025, vol. 155, issue C

Abstract: We study optimal monetary policy in a tractable Small Open Economy Heterogeneous-Agent New Keynesian (SOE-HANK) model in which households face uninsured idiosyncratic risk and unequal bond-market access. We derive conditions under which optimal policy in our SOE-HANK economy entails domestic producer price stability, extending the ”open-economy divine coincidence” result of Galí and Monacelli (2005) beyond the Representative-Agent benchmark (SOE-RANK). Away from those conditions, inefficient fluctuations in consumption inequality generate monetary policy tradeoffs. Under plausible calibrations for the trade elasticities, the elasticity of intertemporal substitution, and the cyclicality of income risk, the central bank stabilizes output and the exchange rate more than in SOE-RANK.

Keywords: Open economy; New keynesian model; Inequality; Optimal policy (search for similar items in EconPapers)
JEL-codes: E21 E30 E52 E63 F31 F41 (search for similar items in EconPapers)
Date: 2025
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Working Paper: Inequality and Optimal Monetary Policy in the Open Economy (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:155:y:2025:i:c:s0022199625000327

DOI: 10.1016/j.jinteco.2025.104076

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