Exchange Rates and Monetary Policy with Heterogeneous Agents: Sizing up the Real Income Channel

Adrien Auclert, Matthew Rognlie, Martin Souchier and Ludwig Straub

No 28872, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Introducing heterogeneous households into a New Keynesian small open economy model amplifies the real income channel of exchange rates: the rise in import prices from a depreciation lowers households’ real income, and leads them to cut back on spending. When the sum of import and export elasticities is one, this channel is offset by a larger Keynesian multiplier, heterogeneity is irrelevant, and expenditure switching drives the output response. With plausibly lower short-term elasticities, however, the real income channel dominates, and the depreciation can be contractionary for output. This weakens monetary transmission and creates a dilemma for policymakers facing capital outflows. Endogenous portfolios and delayed import price pass-through weaken the real income channel, while heterogeneous consumption baskets can strengthen it.

JEL-codes: E52 F32 F41 (search for similar items in EconPapers)
Date: 2021-05
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon, nep-opm and nep-ore
Note: EFG IFM ME
References: Add references at CitEc
Citations: View citations in EconPapers (26)

Downloads: (external link)
http://www.nber.org/papers/w28872.pdf (application/pdf)

Related works:
Working Paper: Exchange Rates and Monetary Policy with Heterogeneous Agents: Sizing up the Real Income Channel (2021)
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:nbr:nberwo:28872

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w28872

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().