Authors: Sushant Acharya and Paolo Pesenti
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Staff Reports
Spillovers and Spillbacks
Number 1089
March 2024
March 2024
JEL classification: E50, F41, F42
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 percent relative to RANK.
Author Disclosure Statement(s)
Sushant Acharya
Sushant Acharya declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Paolo Pesenti
Paolo Pesenti declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Sushant Acharya declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Paolo Pesenti
Paolo Pesenti declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Suggested Citation:
Acharya, Sushant and Paolo Pesenti. 2023. “Spillovers and Spillbacks.” Federal Reserve Bank of New York Staff Reports, no. 1089, March. https://doi.org/10.59576/sr.1089
Acharya, Sushant and Paolo Pesenti. 2023. “Spillovers and Spillbacks.” Federal Reserve Bank of New York Staff Reports, no. 1089, March. https://doi.org/10.59576/sr.1089
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