Monetary policy, agent heterogeneity and inequality: insights from a three-agent New Keynesian model

Maria Eskelinen

No 2590, Working Paper Series from European Central Bank

Abstract: In this paper I develop a New Keynesian dynamic stochastic general equilibrium model which features three different types of representative agents (THRANK): the poor hand-to-mouth, the wealthy hand-to-mouth and the non-hand-to mouth households. Compared to a full-scale HANK model, this model is easier to compute while reproducing many of the same monetary policy shock transmission channels. I show that monetary policy transmission takes place through a redistribution channel, as emphasised by Auclert (2019). In particular, the effects of a monetary policy shock are amplified as resources are redistributed from high-MPC households to low-MPC households. Monetary policy therefore becomes more effective compared to models with homogeneous MPC rates. Consumption inequality is countercyclical in this setting and a high degree of leverage amplifies the redistribution channel. These findings have important implications for understanding the effects of both monetary and macroprudential policy. JEL Classification: D31, E12, E21, E43, E52

Keywords: household heterogeneity; housing market; inequality; monetary policy (search for similar items in EconPapers)
Date: 2021-09
New Economics Papers: this item is included in nep-cba, nep-dge, nep-isf, nep-mac, nep-mon and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20212590

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