Monetary Policy and Redistribution in Open Economies

This paper builds an open-economy heterogeneous-agent New Keynesian (HANK) model in which households differ not only in income and wealth, as in standard closed-economy HANK models, but in their “real integration” (whether they work in a home tradable sector exposed to foreign demand, or a purely domestic nontradable sector) and “financial integration” (whether they can save and borrow internationally, or only in domestic securities priced off the domestic policy rate). Calibrated to Canada, the model is used to revisit three classic questions from Mundell (1963) and Fleming (1962) – the international spillovers of shocks and policies, the comparison of exchange-rate regimes, and the implications of the international price system – but from a distributional rather than purely aggregate perspective. The paper’s central finding is a systematic trade-off between aggregate stabilization and consumption inequality: fixed exchange rates amplify the aggregate response to external shocks (as in standard representative-agent open-economy models) but reduce the cross-household dispersion of that response, because defending a peg requires cutting domestic rates more aggressively, which disproportionately benefits financially non-integrated and nontradable-sector households. A parallel finding is that lower degrees of real and financial integration dampen an economy’s aggregate exposure to external shocks but concentrate their distributional impact on a narrower set of directly-exposed households, leading the authors to conclude that the “discontents” of globalization may stem from integration being insufficiently generalized, rather than from integration itself.

US Public Debt and Safe Asset Market Power

This paper asks whether the U.S. government exploits its market power as the dominant global supplier of safe assets when setting the quantity of public debt, and quantifies the macroeconomic consequences of this strategic behavior. The paper develops a two-country general equilibrium model in which U.S. public debt provides a non-pecuniary benefit to foreign holders (capturing liquidity, collateral, and safety value) and the U.S. is the monopoly provider of this asset — facing a downward-sloping demand curve for Treasuries, so that issuing more debt reduces the convenience yield. The paper then tests empirically whether the data favor this monopoly model over a price-taking benchmark, exploiting the industrial organization insight that rotations in the demand curve (changes in elasticities during high- versus low-volatility regimes) can distinguish strategic from competitive behavior. Using quarterly data from 1935 to 2020, the paper finds that the data reject price-taking behavior in favor of the monopoly model across a wide range of specifications. Quantitatively, the monopoly calibration implies that U.S. market power generates approximately 45% of the observed convenience yield as a markup (about 30 basis points out of 68 basis points on average), causes safe asset supply to be roughly half what it would be under price-taking, and generates welfare gains to the U.S. of 0.21% in permanent consumption equivalents — almost half of which is attributable to market power rather than to the non-pecuniary value itself.

Diego J. Perez | Macro Paper Warehouse

Monetary Policy and Redistribution in Open Economies

US Public Debt and Safe Asset Market Power