Consumption heterogeneity and monetary policy in an open economy

Sihao Chen, Michael Devereux, Kang Shi and Juanyi Xu

Journal of Monetary Economics, 2023, vol. 140, issue C, 1-15

Abstract: We incorporate two types of agents (Ricardian versus Keynesian) into a standard open economy macro model. We find that consumption heterogeneity has major implications for the impact of monetary policy shocks, the international transmission mechanism, and the design of optimal monetary policy. With sticky prices, the existence of Keynesian agents causes a spillover of shocks across countries, and leads to the interdependence of optimal monetary targeting rules. In the case of local currency pricing, consumer heterogeneity leads an optimal monetary policy to generate currency misalignment and deviations from the law of one price. Theoretically, there are ranges of household heterogeneity in which monetary policy becomes ineffective, but this depends sensitively on the interaction of aggregate demand and relative price effects.

Keywords: Tank model; Monetary policy; PCP; LCP; Consumption heterogeneity (search for similar items in EconPapers)
JEL-codes: F3 F4 (search for similar items in EconPapers)
Date: 2023
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Working Paper: Consumption Heterogeneity and Monetary Policy in an Open Economy (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:140:y:2023:i:c:p:1-15

DOI: 10.1016/j.jmoneco.2023.07.001

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