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Spillovers and Spillbacks

Sushant Acharya and Paolo Pesenti

No 1089, Staff Reports from Federal Reserve Bank of New York

Abstract: We study international monetary policy spillovers and spillbacks in a tractable two-country Heterogeneous Agent New Keynesian model. Relative to Representative Agent (RANK) models, our framework introduces a precautionary-savings channel, as households in both countries face uninsurable income risk, and a real-income channel, as households have heterogeneous marginal propensities to consume (MPC). While both channels amplify the size of spillovers/spillbacks, only precautionary savings can change their sign relative to RANK. Spillovers are likely to be larger in economies with higher fractions of high MPC households and more countercyclical income risk. Quantitatively, both channels amplify spillovers by 30-60 percent relative to RANK.

Keywords: monetary policy spillovers; incomplete markets; precautionary savings; real-income channel (search for similar items in EconPapers)
JEL-codes: E50 F41 F42 (search for similar items in EconPapers)
Pages: 60
Date: 2024-03-01
New Economics Papers: this item is included in nep-dge, nep-mac, nep-mon and nep-opm
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DOI: 10.59576/sr.1089

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