The Heterogeneous Costs of Exchange Rate Fluctuations
Movements in exchange rates between international currencies affect the overall macroeconomic performance of different countries. However, the impact of exchange rate fluctuations is not homogenous across households within a country: Compared to households at the upper end of the income distribution, low-income households generally tend to allocate a larger share of their consumption expenditures to imported goods, such as food or clothing. This leaves these households more exposed to exchange rate fluctuations (Fajgelbaum and Khandelwal, 2016; Cravino and Levchenko, 2017). As a result, the political choice between floating and fixed exchange rates has quite different implications for households at different steps of the income distribution. Yet, this aspect is absent from contemporary macroeconomic models of open economies like the Scandinavian countries. The current project therefore aims to develop a macroeconomic model of a small open economy, such as Denmark, featuring heterogeneous effects of exchange rate fluctuations across households, and employ this model to investigate the economic implications of the choice of exchange rate regime for households belonging to different income groups.