Open Economy, Redistribution, and the Aggregate Impact of External Shocks

Abstract

I investigate the role of household heterogeneity and redistribution in the transmission of foreign shocks to aggregate consumption for a small open economy. From theory, I identify key statistics that summarize systematic relationships between marginal propensity to consume (MPC) heterogeneity and shock exposure. Heterogeneous exposure across high-MPC and low-MPC households drives aggregate consumption responses through various redistribution channels. Using micro-data and a calibrated heterogeneous agent New Keynesian model, I gauge the importance of these channels. Most importantly, an unbalanced distribution of foreign-currency nominal wealth significantly amplifies the negative consumption impact of depreciation when more responsive agents are disproportionately less insured against wealth revaluation.