Household Heterogeneity and the Transmission of Foreign Shocks
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

Link to paper: www.nber.org/papers/w26402
Date: 21 January 2020, 13:00 (Tuesday, 1st week, Hilary 2020)
Venue: Manor Road Building, Manor Road OX1 3UQ
Venue Details: Skills Lab
Speaker: Federica Romei (Stockholm School of Economics)
Organising department: Department of Economics
Part of: Department of Economics Seminar
Booking required?: Not required
Audience: Members of the University only
Editor: Melis Clark