December 2024
Supply Shocks and Household Heterogeneity in Open Economies: Implications for Optimal Monetary
Policy
Abstract: Recently many advanced economies have experienced large surges in inflation brought about by
higher import prices. I study the transmission of such cost-push shocks in a small open economy using a
Heterogeneous Agent New Keynesian (HANK) model. Compared to the canonical Representative Agent New
Keynesian (RANK) model, I show that a HANK model with empirically realistic marginal propensities to
consume out of income (MPCs) and sticky wages introduces an additional transmission channel: An increase
in inflation following a cost-push shock suppresses real wages, which suppress aggregate demand when the
MPC out of labor income is greater than the MPC out of profits, highlighting the distributional role of
inflation.
I then compute the optimal monetary policy response to an increase in import prices. I find that a more
hawkish response is optimal in HANK compared to RANK. This is driven by low short-run trade
elasticities combined with positive exchange rate pass-through to import prices, implying that an exchange
rate appreciation can stabilize inflation and real wages without significantly lowering domestic employment.
August 2024
Fiscal Multipliers in Small Open Economies With Heterogeneous Households
Abstract: We study fiscal multipliers in a small open economy Heterogeneous Agent New-Keynesian
(SOE-HANK) model. We provide a set of equivalence results under which the fiscal multiplier in our
SOE-HANK model is the same---at any horizon---as in a corresponding representative-agent (RANK) model.
Under more general assumptions, the fiscal multipliers in the two models are not equivalent, but remain
relatively similar. Yet, we show that the underlying channels driving the fiscal multipliers differ
substantially. In particular, consumption increases while net exports tend to decline in the HANK model,
whereas the opposite is true in the RANK model.
September 2024
The Transmission of Foreign Demand Shocks
Abstract: Introducing heterogeneous households into a New Keynesian model of a
small open economy enables the model to fit a set of stylized empirical facts
about the transmission of foreign demand shocks. In the absence of a strong
labor income effect on consumption, the model counterfactually implies that
domestic consumption decreases as the central bank raises the interest rate to
curb domestic inflation. With plausible marginal propensities to consume, the
model instead produces the observed increase in domestic consumption of both
tradeable and non-tradeable goods. This implies that foreign demand shocks are
more important for international business-cycle comovement than predicted by
existing models. Our findings also have implications for stabilization policies:
While monetary policy is well-suited to counteract foreign demand shocks, traditional
fiscal policies are inadequate, as they do not provide sufficient stimulus
to the tradeable sector. This poses a particular challenge for countries with a
fixed exchange rate or in a monetary union.
September 2024
From Micro to Macro: The Influence of Firm Heterogeneity on Foreign Shock Transmission
Abstract: We investigate the role of firm heterogeneity and adjustment costs in the transmission
of foreign supply shocks. Our starting point comes from a theoretical
insight: If larger firms rely more on easily adjustable inputs, such as materials,
then the aggregate output response to changes in the price of these inputs gets
amplified relative to a representative firm economy. We next provide empirical evidence
that larger firms are indeed more materials-intensive and more responsive
to an exogenous foreign shock. We show that a New-Keynesian general equilibrium
model with multiple sectors and firm heterogeneity is consistent with these
facts. We find that firm heterogeneity, in line with the data, amplifies the response
of output and prices to a foreign supply shock, but dampens the labor and GDP
responses.