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Emerging markets, household heterogeneity and exchange rate policy
I argue that household heterogeneity plays a key role in the transmission of aggregate shocks in emerging market economies. Using Mexico’s 1995 crisis as a case study, I first document empirically that working in the tradable versus non-tradable sector is a crucial determinant of the income and consumption losses of different types of households. Specifically, households in the non-tradable sector suffered much larger income and consumption losses regardless of other household characteristics. To account for the effect of this observation on macroeconomic dynamics, I construct a New Keynesian small open economy model with household heterogeneity along two dimensions: uninsurable sector-specific income and limited financial-market participation. I find that the propagation of shocks in this economy is affected by both dimensions of heterogeneity, with uninsurable sector-specific income playing a quantitatively larger role. In terms of policy, a managed exchange rate policy is more costly overall when households are heterogeneous; however, households in the non-tradable sector benefit from it.
Link to paper: drive.google.com/file/d/1scLgnlOX8ZK463mzGtLShsPdPFF1o_Os/view?usp=sharing
Please sign up for meetings here: docs.google.com/spreadsheets/d/1oFAnK-yvsv3jPAmaKUUeVdv-mw-3sJpQQnmoC0qLRa8/edit#gid=0
Date:
25 May 2021, 13:00
Venue:
Held on Zoom
Speaker:
Gabriela Cugat (Department of the International Monetary Fund)
Organising department:
Department of Economics
Part of:
Macroeconomics Seminar
Booking required?:
Not required
Audience:
Members of the University only
Editor:
Melis Clark
