Work

Inequality and optimal monetary policy in the open economy

Year: 2025

Type: article

Abstract: We study optimal monetary policy in a tractable Small Open Economy Heterogeneous-Agent New Keynesian (SOE-HANK) model in which households face uninsured idiosyncratic risk and unequal bond-market access. We derive conditions under which optimal policy in our SOE-HANK economy entails domestic producer price stability, extending the open-economy divine coincidence result of Galí and Monacelli (2005) beyond the Representative-Agent benchmark (SOE-RANK). Away from those conditions, inefficient fluctuations in consumption inequality generate monetary policy tradeoffs. Under plausible calibrations for the trade elasticities, the elasticity of intertemporal substitution, and the cyclicality of income risk, the central bank stabilizes output and the exchange rate more than in SOE-RANK.

Source: Journal of International Economics

DOI: 10.1016/j.jinteco.2025.104076

Authors: Sushant Acharya, Edouard Challe

Institutions: The University of Melbourne, Centre for Economic Policy Research, Paris School of Economics

Language: English

Topic: Monetary Policy and Economic Impact

Subfield: General Economics, Econometrics and Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $4,300

Funders: Agence Nationale de la Recherche, Higher Education Commission, Pakistan, Università Bocconi, Suomen Pankki