Aggregate uncertainty, HANK, and the ZLB

Alessandro Lin and Marcel Peruffo

No 2911, Working Paper Series from European Central Bank

Abstract: We propose a novel methodology for solving Heterogeneous Agents New Keynesian (HANK) models with aggregate uncertainty and the Zero Lower Bound (ZLB) on nominal interest rates. Our efficient solution strategy combines the sequence-state Jacobian methodology in Auclert et al. (2021) with a tractable structure for aggregate uncertainty by means of a two-regimes shock structure. We apply the method to a simple HANK model to show that: 1) in the presence of aggregate non-linearities such as the ZLB, a dichotomy emerges between the aggregate impulse responses under aggregate uncertainty against the deterministic case; 2) aggregate uncertainty amplifies downturns at the ZLB, and household heterogeneity increases the strength of this amplification; 3) the effects of forward guidance are stronger when there is aggregate uncertainty. JEL Classification: D14, E44, E52, E58

Keywords: computational methods; liquidity traps; monetary policy; new-Keynesian models; zero lower bound (search for similar items in EconPapers)
Date: 2024-02
New Economics Papers: this item is included in nep-cba, nep-cmp, nep-dge, nep-mac and nep-mon
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Related works:
Working Paper: Aggregate uncertainty, HANK, and the ZLB (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20242911

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