Household heterogeneity and the transmission of foreign shocks

Ferra, Sergio de; Mitman, Kurt; Romei, Federica

doi:10.1016/j.jinteco.2020.103303

Cited by 29 publications

(13 citation statements)

References 53 publications

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“…The illiquid asset held by households consists of both capital and shares that are claims to the equity of an aggregate portfolio of intermediate firms. 3 The government raises revenue through a proportional tax on labor income. It uses the revenue to finance purchases of final goods, to pay lump-sum transfers to households, and to pay interest on its outstanding real debt.…”

Section: Hank: Central Elementsmentioning

confidence: 99%

Microeconomic Heterogeneity and Macroeconomic Shocks

Kaplan¹,

Violante²

2018

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I n this essay, we discuss the emerging literature in macroeconomics that combines heterogeneous agent models, nominal rigidities, and aggregate shocks. This literature opens the door to the analysis of distributional issues, economic fluctuations, and stabilization policies-all within the same framework. Quantitative macroeconomic models have integrated heterogeneous agents and incomplete markets for nearly three decades, but they have been mainly used for the investigation of consumption and saving behavior, inequality, redistributive policies, economic mobility, and other cross-sectional phenomena. Representative agent models have remained the benchmark in the study of aggregate fluctuations (for reasons we will discuss later). However, the Great Recession bluntly exposed the shortcomings of a representative-agent approach to business cycle analysis. A broadly shared interpretation of the Great Recession places its origins in housing and credit markets. The collapse in house prices affected households differently, depending on the composition of their balance sheets. The extent to which this

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Section: Hank: Central Elementsmentioning

confidence: 99%

Microeconomic Heterogeneity and Macroeconomic Shocks

Kaplan¹,

Violante²

2018

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“…Credit frictions and balance sheet shocks may help understand the high volatility of consumption in emerging markets and its sharp decline during many crises (Aguiar and Gopinath, 2007;Mendoza, 2010). Our estimates can therefore be used by researchers calibrating recently-developed open-economy heterogeneous models in which households have exchange rate exposure through nominal foreign currency assets and liabilities (de Ferra et al, 2019;Auclert et al, 2021). Furthermore, we provide new evidence on households' margins of adjustment.…”

Section: Introductionmentioning

confidence: 98%

“…Yet household foreign currency debt has represented an important vulnerability in several financial crises, as shown in Figure 1. 1 Moreover, household balance sheets are an important transmission channel in models of international financial crises (Lorenzoni, 2014) and recent heterogeneous agent open economy macro models (de Ferra et al, 2019;Auclert et al, 2021).…”

Section: Introductionmentioning

confidence: 99%

The Anatomy of Consumption in a Household Foreign Currency Debt Crisis

2021

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This paper studies the consumption response to an increase in the domestic value of foreign currency household debt during a large depreciation. We use detailed consumption survey data that follows households for four years around Hungary's 2008 currency crisis. We find that, relative to similar local currency debtors, foreign currency debtors reduce consumption approximately one-for-one with increased debt service, suggesting a role for liquidity constraints. We document a variety of margins of adjustment to the shock. Foreign currency debtors reduce both the quantity and quality of expenditures, consistent with nonhomothetic preferences and "flight from quality." We find no effect on overall household labor supply, consistent with a weak wealth effect on labor supply. However, a small subset of households adjusts labor supply toward foreign income streams. Affected households also boost home production, suggesting a shift in consumption from money-intensive to time-intensive goods.

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“…Several other contributions consider monetary and macroprudential interactions but do not characterize optimal policies (e.g., Aoki, Benigno and Kiyotaki, 2016;Van der Ghote, 2021) . 6 A burgeoning literature is incorporating heterogeneity within open economy New Keynesian models (Bianchi, Ottonello and Presno, 2019;De Ferra, Mitman and Romei, 2020;Guo, Ottonello and Perez, 2020;Auclert et al, 2021) monetary policy and capital controls from a positive and normative perspective.…”

Section: Introductionmentioning

confidence: 99%

Liquidity Traps, Prudential Policies, and International Spillovers

Bianchi

Coulibaly²

2021

Preprint

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We present a simple open economy framework to study the transmission channels of monetary and macroprudential policies and evaluate the implications for international spillovers and global welfare. Using an analytical decomposition, we first identify three transmission channels: intertemporal substitution, expenditure switching, and aggregate income. Quantitatively, expenditure switching plays a prominent role for monetary policy, while macroprudential policy operates almost entirely through intertemporal substitution. Turning to the normative analysis, we show that the risk of a liquidity trap generates a monetary policy tradeoff between stabilizing output today and reducing capital flows to lower the likelihood of a future recession. However, leaning against the wind is not necessarily optimal, even in the absence of capital controls. Finally, we argue that contrary to emerging policy concerns, capital controls are not beggar-thy-neighbor and can enhance global macroeconomic stability.

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Household heterogeneity and the transmission of foreign shocks

Cited by 29 publications

References 53 publications

Microeconomic Heterogeneity and Macroeconomic Shocks

Microeconomic Heterogeneity and Macroeconomic Shocks

The Anatomy of Consumption in a Household Foreign Currency Debt Crisis

Liquidity Traps, Prudential Policies, and International Spillovers

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