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.

Journal of Political Economy Macroeconomics | Macro Paper Warehouse

Monetary Policy and Redistribution in Open Economies