Optimal Monetary Policy According to HANK

Sushant Acharya, Edouard Challe and Keshav Dogra
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Keshav Dogra: Federal Reserve Bank of New York

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Abstract: We study optimal monetary policy in an analytically tractable heterogeneous agent New Keynesian model with rich cross-sectional heterogeneity. Optimal policy differs from a representative agent benchmark because monetary policy can affect consumption inequality, by stabilizing consumption risk arising from both idiosyncratic shocks and unequal exposures to aggregate shocks. The trade-off between consumption inequality, productive efficiency, and price stability is summarized in a simple linear-quadratic problem yielding interpretable target criteria. Stabilizing consumption inequality requires putting some weight on stabilizing the level of output, and correspondingly reducing the weights on the output gap and price level relative to the representative agent benchmark.

Keywords: New Keynesian Model; Incomplete Markets; Optimal Monetary Policy (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-cba, nep-dge, nep-inv and nep-mon
Note: View the original document on HAL open archive server: https://hal.science/hal-04645687v1
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Citations: View citations in EconPapers (4)

Published in American Economic Review, 2023, 113 (7), pp.1741-1782. ⟨10.1257/aer.20200239⟩

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Related works:
Journal Article: Optimal Monetary Policy According to HANK (2023)
Working Paper: Optimal Monetary Policy According to HANK (2023)
Working Paper: Optimal Monetary Policy According to HANK (2021)
Working Paper: Optimal Monetary Policy According to HANK (2020)
Working Paper: Optimal Monetary Policy According to HANK (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04645687

DOI: 10.1257/aer.20200239

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