Comment

Abstract

The heterogeneous agent New Keynesian (HANK) framework has become a leading framework for the analysis of both monetary and, especially,fiscal policy transmission in a closed economy.What are the implications of HANK for open economy dimensions such as the magnitude and the composition of current account deficits? In particular, what were the open economy implications—for capital flows, current account imbalances, and exchange rate adjustment—of the massive fiscal policy response to the COVID-19 pandemic? The current paper addresses these questions by adopting a version of an open economyHANKmodel developed in the earlier work of the authors, which features household heterogeneity in terms of wealth and marginal propensity to consume, nominal wage rigidities, and home bias in consumption that leads to equilibrium real exchange rate dynamics. The paper then asks what the implications are of a HANK framework for current account adjustment in response to a pandemic shock and the fiscal policy that accommodated it. In my discussion, I instead ask what the patterns of current account and exchange rate adjustment are in response to these shocks in the data, and what the likely first-order theoretical mechanisms needed to explain them are. The HANKmodel provides sharp intuitive predictions for the macroeconomic response of aggregate savings to a differential fiscal transfer shock across countries, as summarized in the concluding figure 14 in the paper. A larger local fiscal transfer turns into increased local consumption expenditure by high marginal propensity to consume agents, spread over