open economy, redistribution, and the aggregate impact of
TRANSCRIPT
OPEN ECONOMY, REDISTRIBUTION,AND THE AGGREGATE IMPACT OF EXTERNAL SHOCKS
Haonan Zhou*
December 3, 2020*Princeton University
MOTIVATION
Two important features of emerging market business cycles:• High consumption volatility (Aguiar and Gopinath, 2007).• Subject to external shocks and international spillovers (Miranda-Agrippino and
Rey, 2020).• Exchange rate: key conduit to propagate external shocks.
To limit exposure to external shocks: exchange rate policies.• Little theoretical and quantitative guidance/justification.
This paper: the role of domestic incomplete markets and household heterogeneity.• Redistributive effect of external shocks has aggregate impact.• Forces are stronger when exposed agents have higher MPCs.
Haonan Zhou Redistribution in the open economy 1
THIS PAPER
Identifies redistribution channels from theory:• Extends Clayton et al. (2018) to the open economy: dollar-denominated bond,
dollar-priced tradable goods.• Amplifying or dampening impact of household heterogeneity summarized by:
Cov(MPCi, Exposurei)
(Foreign currency) Fisher: revaluation of net nominal positionConsumption expenditure: pass-through to consumption basketEarnings heterogeneity: sector-specific income exposure...
Provides measurement of redistribution channels using Uruguayan micro data• Strongest: Foreign-currency Fisher channel.
Haonan Zhou Redistribution in the open economy 2
THIS PAPER
Quantitative exploration: open economy Huggett model in GE• Nonhomothetic preferences; $ and peso-denominated bond; nominal rigidity.• Calibrated using micro and macro moments.
Redistribution substantially amplifies effect of foreign monetary policy tightening• Consumption expenditure channel: 14% larger contraction of initial
consumption relative to homothetic case.• Foreign-currency Fisher channel: 5–30% larger drop relative to
Cov(MPCi,NNP Exposurei) = 0.
In progress: Decomposition of VAR estimates; Two-asset extension
Haonan Zhou Redistribution in the open economy 3
RELATED LITERATURE
Direct extension of closed-economy HANK literature:• Analytical decomposition: Auclert (2019); Slacalek et al. (2020); Kekre and Lenel(2020a); Clayton et al. (2018) (henthforth CJS).
• Heterogeneous incidence for aggregate shocks: Almgren et al. (2019); Alves et al.(forthcoming); Broer et al. (2020).
Heterogeneous agents, distribution, and international macro• Theoretical models: Mendoza et al. (2009); Cugat (2019); Kekre and Lenel (2020b);De Ferra et al. (2020); Ferrante and Gornemann (2020).
• Empirical analyses: Cravino and Levchenko (2017); Drenik et al. (2018); Blancoet al. (2020)
This paper:• Identifies redistribution channels from theory, provides empirical measurement.• Disciplines quantitative model using novel micro-data.
Haonan Zhou Redistribution in the open economy 4
ROADMAP OF TALK
Analytical decomposition
EmpiricsOverview of dataMeasuring redistribution channels
Quantitative model
Haonan Zhou Redistribution in the open economy 5
TWO-PERIOD, PERFECT FORESIGHT, PARTIAL EQUILIBRIUM
Household budget constraints:
pN0cNi0 + e0cTi0 + ωi1 = pN
0γNi (yN0 ) + e0γT
i (yT0) + (1+ i0)ai0 + (1+ i∗0)e0bi0
pN1 cNi1 + e1cTi1 = pN
1 γNi (yN1 ) + e1γT
i (yT1) + (1+ i1)ωi1
cTit/cNit : consumption of tradable (dollar-priced) / nontradable goodset: nominal exchange rateai0/bi0: peso/dollar-denominated nominal legacy bondγsi (·): income sourced from sector s ∈ {T,N}Preferences:• CRRA preferences with RRA σ.• Consumption: Cobb-Douglas aggregator over tradable and nontradable goods:
. In GE model: generalized CES (nonhomotheticity).
cit = (cTit)1−αi(cNit)αi , t ∈ {0, 1}
Haonan Zhou Redistribution in the open economy 6
DECOMPOSITION OF AGGREGATE CONSUMPTION RESPONSEIn response to an external shock – a perturbation at t = 0 in the form of{dq,dpN
0 ,dR,dyN0 ,dyT0}: Simplifying assumptions and definitions Equations
R ≡ (1+ i1/(pN1 /pN0 )), q0 = q1 ≡ q = e/p.
dC0 = MPC0 × E0︸︷︷︸Average exposure
+ Cov(MPCi0, Ei0)︸ ︷︷ ︸Redistribution channels
.
Redistribution channels in the open economy:
+Cov(MPCi0, γNi ) · dyN0 ,+Cov(MPCi0, γ
Ti ) · dyT0 [Earnings heterogeneity]
+Cov(MPCi0,bi0) · dq [Fisher (foreign currency)]−Cov(MPCi0, ai0) · dp [Fisher (domestic currency)]−Cov(MPCi0,Ξi0) · dq [Consumption expenditure]+Cov(MPCi0, γ
Ti ) · dq [Foreign-currency earnings]
Haonan Zhou Redistribution in the open economy 7
ROADMAP OF TALK
Analytical decomposition
EmpiricsOverview of dataMeasuring redistribution channels
Quantitative model
Haonan Zhou Redistribution in the open economy 8
OVERVIEW OF DATA
Three datasets from Uruguay:
Continuous Household Survey (ECH)• Basic socio-demographic and labor market information.
Household Financial Survey (EFHU-3)• Add-on module to ECH (2017). Structure is similar to Spanish EFF.• Household balance sheets (assets and liabilities), with currency breakdown.• Oversamples wealthy households.
Consumption Expenditure Survey (ENGIH)• 8-digit product level expenditure survey conducted from late 2016 to 2017.• Purchases with reference period more than one month are standardized into
monthly expenses.• Direct linkage to ECH-EFHU is not available, but allows for imputation.
Haonan Zhou Redistribution in the open economy 9
OVERVIEW OF DATA
• Direct MPC estimation infeasible. Infer (poor and wealthy) hands-to-mouth(HtM) status following Kaplan et al. (2014).
• Impute HtM label in ENGIH dataset using objective characteristics andself-assessment.
• Manually identify tradable goods/industries, following Cravino and Levchenko(2017); Drenik and Perez (2020).
Why Uruguay? Beyond data availability...• Financial dollarization: 70% of all deposits; 50% of all loans. (Toscani, 2018)• Goods-market dollarization: 14% share in CPI basket; tradable goods and
housing more likely to be dollar priced. (Toscani, 2018; Drenik and Perez, 2020)
Haonan Zhou Redistribution in the open economy 10
REDISTRIBUTION CHANNELS: FROM MODEL TO DATA
Covariate Model correspondence Channel Value (s.e.)
Net nominal dollar position Cov(HtMi0,
qbi0E[ci0 ]
)Fisher (foreign currency) -1.064 (0.053)
Net nominal peso position Cov(HtMi0,
p−1i ai0E[ci0 ]
)Fisher (domestic currency) -0.009 (0.058)
Household income due to tradable sectors Cov(HtMi0,
γTi y
T0
E[ci0 ]
)Earnings heterogeneity -0.011 (0.002)
Tradable consumption expenditure Cov(HtMi0,
(1−αi)pici0E[ci0 ]
)Consumption expenditure -0.048 (0.003)
• Data: Households are predominantly hand-to-mouth (>75%, US: 31%).• Large covariance associated with Fisher channel: dollar savings concentrated in the
hands of the wealthy; some liquidity-constrained households leveraged in dollar debt.. Interpreted as elasticity in TANK framework: 1% depreciation ⇒ 1.064% additional ↓ of C0 .
• Consumption expenditure channel (<0) dominated by level effect: low-MPC householdsmore exposed due to high overall expenditure, despite a smaller tradable share.
Hand-to-mouth Balance sheet Consumption Income
Haonan Zhou Redistribution in the open economy 11
ROADMAP OF TALK
Analytical decomposition
EmpiricsOverview of dataMeasuring redistribution channels
Quantitative model
Haonan Zhou Redistribution in the open economy 12
MODEL OVERVIEW
• Discrete time, infinite horizon, small-open-economy populated by ex-postheterogeneous agents.
• Household portfolio: perfectly substitutable dollar and peso nominal bond.
• Consumption bundle: generalized CES with bias in tradable goods:
cit =[(1− α)
1η (cNit)
η−1η + α
1η (cTit − c)
η−1η
] ηη−1
.
• Production: nontradable sector features Rotemberg price ridigity.
• Domestic monetary authority responds to CPI inflation and depreciation:
1+ it+1 = (1+ r̄)(πt)ϕπ · (et/et−1)
ϕe .
Haonan Zhou Redistribution in the open economy 13
EQUILIBRIUM, TRANSITION DYNAMICS
• NFA position well-defined, unlike incomplete-market RA model. (Schmitt-Grohéand Uribe, 2003)
• Unique equilibrium in real terms: normalize e = 1 and recast the model.
Quantitative experiment: 25bps surprise hike of i∗1 announced at t = 0. (MIT shock)
−1 0 1steady state: ai0
i∗1 announced
q0, r0 jumps
ai1 set t
• At t = 0: unexpected capital gains/losses due to jumps in r0,q0.• s(a): Dollar share in net worth. Ex-post real portfolio return with steady-statewealth a: (qt ≡ et/pt)
1+ ra0(a) = (1+ r0) · (1− s(a))︸ ︷︷ ︸parameterized exogenously
+(1+ r∗0)q0q−1
· s(a).
• Parametrize s(a) in different ways to isolate the effect of redistribution channels.
Haonan Zhou Redistribution in the open economy 14
CALIBRATION
Common parameters across specifications: standard in the literature. Table
• Borrowing limit, s.d. of idiosyncratic productivity: (non-reserve) NFA/GDP = -0.49.
• Consumption bias/weight: tradable consumption share (average/top/bottomincome decile).
Calibrate s(a): two approaches –• Match dollar share in NNP for conditional quantiles of wealth distribution. Detail
• Match Cov(MPCi,Dollar exposure of NNP) = −0.166. Implied covariances
Haonan Zhou Redistribution in the open economy 15
GE IMPACT: CONSUMPTION EXPENDITURE CHANNEL
IRF (1) (2) (3)PE decomposition Homothetic Nonhomothetic Nonhomothetic
c = 0 c = 0.28 c = 0.28s(a) = 0.25 s(a) = 0.25 s(a) matches EI[aiF0], CovI
(MPCi,
aiF0(EI [ci ])−1
)in (1)
Model-implied moments:MPC 0.127 0.116 0.116EI[q−1aiF0] -0.180 -0.155 -0.180CovI
(MPCi,
q−1aiF0(EI [ci ])−1
)-0.009 -0.011 -0.009
CovI(MPCi,
q−1cTi
(EI [ci ])−1
)-0.0046 -0.0037 -0.0037
Time-0 change relative to steady state (bps):Consumption (c) -37.54 -42.71 -42.78Tradable consumption (cT) -50.96 -44.81 -44.87Nontradable consumption (cN) -27.16 -39.03 -39.10RER (q) 26.83 28.85 28.89
Haonan Zhou Redistribution in the open economy 16
GE IMPACT: FOREIGN-CURRENCY FISHER CHANNEL
Variable/Statistic/Variant (1) (2) (3) (4)
s(a) targeting: Conditional quantiles MPC covariance EI[q−1aiF0] of (1) EI[q−1aiF0] of (2)
Model-implied moments:
EI[q−1aiF0] 0.056 -3.17 0.056 -3.17
CovI(MPCi,
q−1aiF0(EI [ci ])−1
)-0.017 -0.166 0.003 -0.000
Time-0 change relative to steady state (bps):
Consumption (c) -36.31 -84.04 -34.51 -64.75
Tradable consumption (cT) -49.56 -102.01 -47.62 -81.25
Nontradable consumption (cN) -26.07 -70.14 -24.36 -52.00
RER (q) 26.49 35.93 26.23 33.00
PE decomposition
Haonan Zhou Redistribution in the open economy 17
CONCLUSION
This paper:• Identifies redistribution channels from theory.
• Evaluates the empirical and quantitative relevance of redistribution channels.
Practical implications:• Targeted macroprudential policies in the financial market and de-dollarization policies in
the goods market help mute the redistribution channels.
Possible extensions:• Two-asset HANK. (Better fit of wealth distribution)
• Endogenous portfolio choice. (Allow for gross positions)
• Financial and nominal frictions. (The role of banks and downward wage rigidity)
• Welfare and optimal policy. (Cost/benefit of “fear for floating”)
Haonan Zhou Redistribution in the open economy 18
ANALYTICAL DECOMPOSITION: SIMPLIFYING ASSUMPTIONS AND DEFINITIONS
Assume:• i0 = i∗0 = 0.• γj
i(yjt) = γj
i · yjt, j ∈ {T,N} (Werning, 2015; Clayton et al., 2018).
Present-value budget constraint: (qt ≡ et/pNt )
cN0 + q0cT0 +cN1 + q1cT1
R = γNi yN0 + q0γ
Ti yT0 +
γNi yN1 + q1γ
Ti yT1
R +ai0pN0+ q0bi0︸ ︷︷ ︸
yi
(1)
R ≡ (1+ i1/(pN1 /pN
0 )): real interest rate from t = 0 to 1.
For perturbation:• Follow CJS to consider period 1 as the long run, to abstract away from
perturbations to long-run output yN1 and yT1 .
• Further restricted to the case in which q0 = q1 = q, so that the response of realexchange rate to the external shock is permanent. Back
Haonan Zhou Redistribution in the open economy 1
PROPOSITION: CONSUMPTION DECOMPOSITION
Proposition 2Under the posited perturbation:
dC0 =
Substitution︷ ︸︸ ︷−σ−1E[ci0(1− κ−1
i q1−αiMPCi0)]dRR
+p−1[MPC · E[ωi1] +
Unhedged interest rate exposure︷ ︸︸ ︷Cov(MPCi0, ωi1) ]
dRR
+ MPC · (dyN0 + qdyT0)︸ ︷︷ ︸Aggregate income
+ Cov(MPCi0, γNi )dy
N0 + qCov(MPCi0, γT
i )dyT0︸ ︷︷ ︸
Earnings heterogeneity
+[q(MPC · E[bi0] + Cov(MPCi0, bi0)︸ ︷︷ ︸
Fisher (foreign currency)
)dqq
− p−1(MPC · E[ai0] + Cov(MPCi0, ai0)︸ ︷︷ ︸Fisher (domestic currency)
)dpp
]
+ (MPC+ Cov(MPCi0, γTi )︸ ︷︷ ︸
Price of earnings
)q(yT0 + R−1yT1 )dqq
− [MPC · Ξ + Cov(MPCi0,Ξi,0)︸ ︷︷ ︸Consumption expenditure
]dqq
(2)
where Ξi,0 ≡ κ−1i q1−αi(1− αi)(ci0 + R−1ci1).
Back
Haonan Zhou Redistribution in the open economy 2
HAND-TO-MOUTH HOUSEHOLDS: SUMMARY STATISTICS
ECH-EFHU dataset:Non-HtM Poor HtM Wealthy HtM
Population share (%) 23.35 27.14 49.51Average age 50.23 44.79 53.01Median monthly income (USD) 2904 1590 1939Average monthly income (USD) 3661 1832 2317Has credit cards (% within group) 84.55 46.44 57.64
ENGIH dataset:Non-HtM Poor HtM Wealthy HtM
Population share (%) 24.11 25.28 50.61Average age 49.10 43.55 54.03Median monthly income (USD) 2817 1287 1548Average monthly income (USD) 3395 1411 1743Tradable share in consumption expenditure (%) 41.80 45.36 44.03
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Haonan Zhou Redistribution in the open economy 3
BALANCE SHEET AND CURRENCY BREAKDOWN
Non-HtM Poor HtM Wealthy HtM
Median illiquid debt (if nonzero, in USD)All 5000 1800 3300Peso 4074 1650 3000Dollar 3500 1312.5 3000
Median net liquid wealth (in USD)All 3000 0 0Peso 375 0 0Dollar 2625 0 0
Average net liquid wealth (in USD)All 11400 11.27 48.10Peso 2350 -14.14 -13.12Dollar 9049 25.41 61.22
Large degree of wealth inequality:• Nearly 70% of all households: zero
liquid asset.
• <15% exceeds one month’s income.
Leverage:• Non-HtM hold much more debt than
poor-HtM.
• Conditional on leveraged in dollar,wealthy-HtM has similar medianindebtedness to non-HtM.
Local linear regressions
Back
Haonan Zhou Redistribution in the open economy 4
LOCAL LINEAR REGRESSIONS0
.2.4
.6.8
Prop
ensi
ty to
hol
d do
llar
0 2 4 6 8 10Monthly income decile
Asset Debt
(a) Unconditional
0.2
.4.6
.8Pr
open
sity
to h
old
dolla
r
0 2 4 6 8 10Monthly income decile
Asset Debt
(b) Conditional on nonzero wealth
Figure: Propensity to hold dollar asset and debt by income decile
Back
Haonan Zhou Redistribution in the open economy 5
CONSUMPTION INEQUALITY ALONG THE WEALTH DISTRIBUTION
Category / Group Non-HtM Poor HtM Wealthy HtM Aggregate
Food and non-alcoholic beverages 14.62 21.24 20.42 18.57Alcoholic beverages and tobacco 0.98 1.36 1.10 1.10Apparel 3.04 3.91 3.09 3.23Housing and utilities 26.63 29.11 28.96 28.27Furniture and home appliances 5.02 2.96 3.33 3.86Medical care 10.00 12.56 12.44 11.57Transportation 15.07 7.98 10.02 11.40Communications 3.11 4.04 3.74 3.57Culture and recreation 7.28 5.91 5.74 6.29Education 4.40 1.93 2.18 2.87Hotels and restaurants 4.72 3.76 3.27 3.87Other goods and services 5.12 5.25 5.72 5.41
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Haonan Zhou Redistribution in the open economy 6
EMPLOYMENT AND INCOME FROM TRADABLE SECTOR
Decile Employment share Income share
1 0.197 0.1802 0.222 0.2023 0.225 0.1894 0.247 0.2085 0.263 0.2106 0.239 0.1707 0.252 0.1728 0.255 0.1619 0.231 0.14010 0.223 0.144
Back
Haonan Zhou Redistribution in the open economy 7
CALIBRATION: COMMON PARAMETERS
Parameter Description Value Target/Source
β Time preference 0.975σ EIS−1 2 Stockman and Tesar (1995)ϕ Inverse of Frisch elasticity 0.5η Tradable/nontradable goods elasticity of substitution 0.5 Cugat (2019)κ Tradable labor disutility 0.3ρzT Persistence of tradable productivity 0.95ρzN Persistence of nontradable productivity 0.95δ Curvature in tradable production 0.57 Cugat (2019)ε Elasticity of substitution of nontradable varieties 11 De Loecker and Eeckhout (2020)i∗ Foreign interest rate 0.01 Neumeyer and Perri (2005)θ Price adjustment cost parameter 100 De Ferra et al. (2020)ϕπ Interest rate sensitivity to inflation 1.5ϕe Interest rate sensitivity to depreciation 0.5a Borrowing limit -1.2 (NFA-Reserve)/GDP = -0.49
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Haonan Zhou Redistribution in the open economy 8
CALIBRATING s(a): MATCH WEALTH DISTRIBUTION
-4.204
-2.321-1.3 -.6 -.3
0
.5
3
10
22.5 50
0.2
.4.6
.8Sh
are
of d
olla
r in
net w
orth
34 46 57 71 79 88 92 96 98 99 100Percentile of stationary distribution
sJ :=∑
i∈J[($ Assets)i − ($ Liabilities)i]∑i∈J Net Nominal Positioni
• Well-defined except for zero net worthhouseholds.
• Also drop households with offsettingdollar/peso positions.
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Haonan Zhou Redistribution in the open economy 9
MPC COVARIANCES WITH EXPOSURE: DATA VS. MODEL
Channel Model correspondence Data Model, targeting wealth distribution:Conditional quantiles MPC covariances
Consumption expenditure Cov(MPCi0,
(1−αi)pici0E[ci0 ]
)-0.007 -0.005 (Homothetic) / -0.004 (Non-homothetic)
Foreign-currency Fisher Cov(MPCi0,
qbi0E[ci0 ]
)-0.166 -0.017 -0.166
• MPC is assigned to each identified household group based on baseline estimates ofKaplan et al. (2014). MPCNon-HtM = 0.127,MPCPoor-HtM = 0.243,MPCWealthy-HtM = 0.3.
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Haonan Zhou Redistribution in the open economy 10
IMPULSE RESPONSE FUNCTIONS
0 50 1000
10
20
0 50 1000
50 Homothetic
Nonhomothetic
0 50 100-20
0
20
40
0 50 1000
0.1
0.2
0 50 1000.5
1
1.5
0 50 100
0
0.2
0.4
0 50 1000
1
2
0 50 100
0
0.5
1
0 50 100
-1
-0.5
0
0 50 100
Horizon
-0.4
-0.2
0
0 50 100
Horizon
-0.4
-0.2
0
Homothetic
Nonhomothetic
0 50 100
Horizon
-0.4
-0.2
0
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Haonan Zhou Redistribution in the open economy 11
IRF DECOMPOSITION: CONSUMPTION EXPENDITURE CHANNEL
(1) (2) (3)
Homothetic Nonhomothetic Nonhomothetic
c = 0 c = 0.28 c = 0.28
s(a) = 0.25 s(a) = 0.25 s(a) matches EI[aiF0], CovI(MPCi,
aiF0(EI [ci ])−1
)in (1)
IRF decomposition of c0 (%):
q 2.28 2.38 2.43
r 56.16 55.57 55.53
wN/p 65.14 64.67 64.65
wT/p 2.92 3.09 3.09
Transfer -25.37 -24.86 -24.85
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Haonan Zhou Redistribution in the open economy 12
IRF DECOMPOSITION: FOREIGN-CURRENCY FISHER CHANNEL
Variable/Statistic/Variant (1) (2) (3) (4)
s(a) targeting: Conditional quantiles MPC covariance EI[q−1aiF0] of (1) EI[q−1aiF0] of (2)
IRF decomposition of c0 (%):
q 1.16 24.52 -0.76 18.14
r 57.16 35.56 58.76 41.70
wN/p 65.58 56.14 66.65 58.89
wT/p 2.69 7.55 2.19 6.12
Transfer -25.46 -23.36 -25.68 -24.02
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Haonan Zhou Redistribution in the open economy 13