Abstract:
Introducing heterogeneous households to a New-Keynesian small open economy model resurrects 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. This channel counteracts the standard expenditure-switching channel of exchange rates, and can result in contractionary devaluations. We study the implications of the real income channel for monetary policy.

* To join the seminar, please contact at econ.events@umich.edu