Exchange Rates and Monetary Policy with Heterogeneous Agents: Sizing up the Real Income Channel / Adrien Auclert, Matthew Rognlie, Martin Souchier, Ludwig Straub.

Format:

Book

Author/Creator:

Auclert, Adrien.

Contributor:

National Bureau of Economic Research.

Rognlie, Matthew.

Souchier, Martin.

Straub, Ludwig.

Series:

Working Paper Series (National Bureau of Economic Research) no. w28872.

NBER working paper series no. w28872

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2021.

Summary:

Introducing heterogeneous households to 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 incomes, 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 depreciation can be contractionary for output. This weakens monetary transmission and creates a dilemma for policymakers facing capital outflows. Delayed import price pass-through weakens the real income channel, while heterogeneous consumption baskets can strengthen it.

Notes:

Print version record

May 2021.