Presenter: Ludwig Straub
Affiliation: Department of Economics, Harvard University
Date: July 7, 2021
Time: 15:00 IDT (GMT+3)
Abstract: Introducing heterogeneous households to a New-Keynesian small open economy model amplifies the real income channel of exchange rates: the rise in import prices from a depreciation lowers households’ real incomes, and leads them to cut back on spending. This channel counteracts the standard expenditure-switching channel of exchange rates, and can result in a contractionary effect of a depreciation on domestic output. We study the monetary policy implications of a large and dominant real income channel.