Auclert, Adrien. <br/><br/>
Exchange Rates and Monetary Policy with Heterogeneous Agents:  Sizing up the Real Income Channel / 
Adrien Auclert, Matthew Rognlie, Martin Souchier, Ludwig Straub. 
 - Cambridge, Mass.  National Bureau of Economic Research  2021. 
 - 1 online resource:  illustrations (black and white); 
 - NBER working paper series  no. w28872 .
 - Working Paper Series (National Bureau of Economic Research)  no. w28872. .
<br/><br/> May 2021. 
<br/><br/> 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. When the sum of import and export elasticities is one, this channel is offset by a larger Keynesian multiplier, heterogeneity is irrelevant, and expenditure switching drives the output response. With plausibly lower short-term elasticities, however, the real income channel dominates, and depreciation can be contractionary for output. This weakens monetary transmission and creates a dilemma for policymakers facing capital outflows. Delayed import price pass-through weakens the real income channel, while heterogeneous consumption baskets can strengthen it. 
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