Inequality and optimal monetary policy in the open economy

Sushant Acharya and Edouard Challe ()
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Sushant Acharya: University of Melbourne, CEPR - Center for Economic Policy Research
Edouard Challe: PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CEPR - Center for Economic Policy Research

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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)
Date: 2025-05
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Published in Journal of International Economics, 2025, 155, pp.104076. ⟨10.1016/j.jinteco.2025.104076⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:pseptp:halshs-05148791

DOI: 10.1016/j.jinteco.2025.104076

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