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Spillovers and Spillbacks

Author

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  • Acharya, Sushant
  • Pesenti, Paolo

Abstract

We study international monetary policy spillovers and spillbacks in a tractable two-country Heterogeneous Agent New Keynesian model. Relative to Representative Agent (RANK) models, our framework introduces a precautionary-savings channel, as households in both countries face uninsurable income risk, and a real-income channel, as households have heterogeneous marginal propensities to consume (MPC). While both channels amplify the size of spillovers/spillbacks, only precautionary savings can change their sign relative to RANK. Spillovers are likely to be larger in economies with higher fractions of high MPC households and more countercyclical income risk. Quantitatively, both channels amplify spillovers by 30-60% relative to RANK.

Suggested Citation

  • Acharya, Sushant & Pesenti, Paolo, 2024. "Spillovers and Spillbacks," CEPR Discussion Papers 18900, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:18900
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    Keywords

    Monetary policy spillovers; Incomplete markets; Precautionary savings; Real-income channel;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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