Household Heterogeneity and the Transmission of Foreign Shocks / Sergio de Ferra, Kurt Mitman, Federica Romei.

Format:

Book

Author/Creator:

de Ferra, Sergio.

Contributor:

National Bureau of Economic Research.

Mitman, Kurt.

Romei, Federica.

Series:

Working Paper Series (National Bureau of Economic Research) no. w26402.

NBER working paper series no. w26402

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2019.

Summary:

We study the role of heterogeneity in the transmission of foreign shocks. We build a Heterogeneous-Agent New-Keynesian Small Open Model Economy (HANKSOME) that experiences a current account reversal. Households' portfolio composition and the extent of foreign currency borrowing are key determinants of the magnitude of the contraction in consumption associated with a sudden stop in capital inflows. The contraction is more severe when households are leveraged and owe debt in foreign currency. In this setting, the revaluation of foreign debt causes a larger contraction in aggregate consumption when debt and leverage are concentrated among poorer households. Closing the output gap via an exchange-rate devaluation may therefore be detrimental to household welfare due to the heterogeneous impact of the foreign debt revaluation. Our HANKSOME framework can rationalize the observed "fear of floating" in emerging market economies, even in the absence of contractionary devaluations

Notes:

Print version record

October 2019.