Working Paper: NBER ID: w28213
Authors: Xing Guo; Pablo Ottonello; Diego J. Perez
Abstract: We study how monetary policy affects the asymmetric effects of globalization. To this end, we build an open-economy heterogeneous-agent New Keynesian model (HANK), in which households differ in their income, wealth, and real and financial integration with international markets. We use the model to reassess classic questions in international macroeconomics, but from a distributional perspective: What are the international spillovers of policies and shocks, how do alternative exchange-rate regimes compare, and what are the implications for monetary policy of the international price system. Our results indicate the presence of a trade-off between aggregate stabilization and inequality in consumption responses to external shocks. The asymmetric effects of globalization can be smaller for economies with higher international integration.
Keywords: monetary policy; globalization; redistribution; open economies; household heterogeneity
JEL Codes: E21; E52; F3; F32; F41; F6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| expansionary monetary policy shocks (E39) | aggregate consumption (E20) |
| expansionary monetary policy shocks (E39) | inflation (E31) |
| expansionary monetary policy shocks (E39) | income in tradable sectors (F16) |
| income in tradable sectors (F16) | consumption in tradable sectors (E20) |
| currency depreciation (F31) | differential impact on households (G59) |
| contractionary external demand shocks (F41) | currency depreciation (F31) |
| currency depreciation (F31) | raise interest rates (E43) |
| raise interest rates (E43) | disproportionately affect households without access to international capital markets (F65) |
| fixed exchange-rate regimes (F33) | amplify aggregate responses to shocks (E13) |
| fixed exchange-rate regimes (F33) | exacerbate inequality in consumption responses (F61) |
| international price system (P22) | influences effectiveness of monetary policy (E52) |
| international price system (P22) | influences distributional consequences of monetary policy (D39) |
| higher degrees of dollar-currency pricing (F31) | more uneven responses across households (D19) |