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Inequality and optimal monetary policy in the open economy

Author

Listed:
  • Sushant Acharya

    (University of Melbourne, CEPR - Center for Economic Policy Research)

  • Edouard Challe

    (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CEPR - Center for Economic Policy Research)

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.

Suggested Citation

  • Sushant Acharya & Edouard Challe, 2025. "Inequality and optimal monetary policy in the open economy," Post-Print halshs-05148791, HAL.
    • Handle: RePEc:hal:journl:halshs-05148791
    DOI: 10.1016/j.jinteco.2025.104076
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    References listed on IDEAS

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    1. Bellifemine, Marco & Couturier, Adrien & Jamilov, Rustam, 2025. "Monetary unions with heterogeneous fiscal space," LSE Research Online Documents on Economics 128186, London School of Economics and Political Science, LSE Library.

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    Keywords

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    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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