External Shocks and Monetary Policy Trade-offs in Low-Income Countries
IMF Working Papers, October 3, 2025
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Bibliographic details
- Authors: Juan Passadore, Giovanni Sciacovelli, Filiz D Unsal, Carlos van Hombeeck
- Published: October 3, 2025
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798229025836.001
Authors and Publication
- Authors: Juan Passadore, Giovanni Sciacovelli, Filiz D Unsal, Carlos van Hombeeck
- Publication: IMF Working Papers
- Working Paper No.: 2025/204
- Volume: 2025
- Issue: 204
- Pages: 73
- DOI: https://doi.org/10.5089/9798229025836.001
- Stock No: WPIEA2025204
- ISBN: 9798229025836
- ISSN: 1018-5941
- Publication date: October 3, 2025
Model and Calibration
- Framework: Open Economy HANK model tailored to Low-Income Countries (LICs).
- Key features preserved from source:
- Hand-to-mouth households.
- A subsistence consumption component for tradable goods.
- Calibration: Model calibrated for a representative LIC to illustrate framework responses.
External Price Shock: Macroeconomic Effects
- Core simulated shock: shock to external prices.
- Macro outcomes reported:
- The shock causes a consumption-led recession.
- An increase in inflation.
- A drop in real wages.
Distributional Effects
- Consumption inequality:
- Consumption inequality rises following the external price shock.
- Mechanism: poor households cannot insure against the shock; richer households can tap into their wealth.
- Welfare impacts:
- Poorer households’ welfare cannot be substantively improved by monetary policy due to offsetting effects on real wages and labor demand.
Monetary Policy Analysis and Simulations
- Simulated alternatives:
- Simulations of the effects of alternative monetary policy responses on inequality yield similar findings (i.e., limited ability of monetary policy to improve poorer households’ welfare).
- Transmission channels emphasized:
- Real wages and labor demand interactions that offset monetary policy effects for poorer households.
Policy Implications and Recommendations
- Monetary policy trade-off:
- Monetary policy is constrained in its capacity to redistribute or materially improve welfare for the poor under the modeled external shock.
- Fiscal policy recommendation:
- In this setting, fiscal transfers are a more effective tool for redistribution across households.
Subject Areas and Keywords (as listed)
- Subject: Consumption, Import prices, Income, Inflation, Labor, National accounts, Prices, Real wages
- Keywords: Consumption, consumption inequality, IMF working papers, Import prices, Income, Inequality, Inflation, Low-income Countries, Monetary Policy, monetary policy response, monetary policy trade-off, Open Economy HANK, Real wages, representative LIC
IMF Working Paper: "External Shocks and Monetary Policy Trade-offs in Low-Income Countries", Working Paper No. 2025/204 (October 3, 2025) by Juan Passadore, Giovanni Sciacovelli, Filiz D Unsal, and Carlos van Hombeeck.
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