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

93 Pages Posted: 31 May 2021 Last revised: 22 May 2023

See all articles by Adrien Auclert

Adrien Auclert

Stanford University - Department of Economics

Matthew Rognlie

Northwestern University

Martin Souchier

Stanford University

Ludwig Straub

Harvard University

Multiple version iconThere are 2 versions of this paper

Date Written: May 2021

Abstract

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.

Suggested Citation

Auclert, Adrien and Rognlie, Matthew and Souchier, Martin and Straub, Ludwig, Exchange Rates and Monetary Policy with Heterogeneous Agents: Sizing Up the Real Income Channel (May 2021). NBER Working Paper No. w28872, Available at SSRN: https://ssrn.com/abstract=3856853

Adrien Auclert (Contact Author)

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States

Matthew Rognlie

Northwestern University

Martin Souchier

Stanford University

Ludwig Straub

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
29
Abstract Views
224
PlumX Metrics