Precautionary saving and un-anchored expectations

Alex Grimaud

No 08/2021, ECON WPS - Working Papers in Economic Theory and Policy from TU Wien, Institute of Statistics and Mathematical Methods in Economics, Economics Research Unit

Abstract: This paper investigates monetary policy in a heterogeneous agent new Keynesian (HANK) model where agents face idiosyncratic income risk and use adaptive learning in order to form their expectations. Households experience different histories and observe different idiosyncratic variables. This gives rise to idiosyncratic learning processes, which naturally implies the existence of heterogeneous expectations. In HANK models, supply shocks generate precautionary saving. The learning setup amplifies this effect and can result in long-lasting disinflationary traps. Dovish Taylor rules focused on closing the output gap dampen the learning effects. Price level targeting improves the inflation and output stabilization trade-off by better anchoring expectations.

Keywords: adaptive learning; precautionary saving; restricted perception equilibrium; heterogeneous expectations; heterogeneous agent (search for similar items in EconPapers)
JEL-codes: E25 E31 E52 E70 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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Working Paper: Precautionary saving and un-anchored expectations (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:tuweco:082021

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