Household Heterogeneity and the Transmission of Foreign Shocks
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Chapter in forthcoming NBER book NBER International Seminar on Macroeconomics 2019, Kristin Forbes and Pierre-Olivier Gourinchas, organizers
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.This chapter is not currently available on-line.
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Document Object Identifier (DOI): https://doi.org/10.1016/j.jinteco.2020.103303This chapter first appeared as NBER working paper w26402, Household Heterogeneity and the Transmission of Foreign Shocks, Sergio de Ferra, Kurt Mitman, Federica Romei