Active vs. passive policy and the trade-off between output and inflation in HANK

Noah Kwicklis

Journal of Monetary Economics, 2025, vol. 151, issue C

Abstract: When fiscal policy is active and monetary policy is passive in a heterogeneous agent New Keynesian (HANK) model, deficit-financed transfers to low-asset households lead to similar cumulative inflation but greater increases in real output than transfers to wealthier households. I use the inverse of the “Phillips multiplier”, the price level sacrifice ratio, to quantify this dynamic. Household heterogeneity and targeted policy change the timing of output gaps, making this consistent with the Phillips Curve and rendering conventional sacrifice ratio intuition misleading for assessing the inflation/output trade-off between policies.

Keywords: Fiscal theory; Heterogeneity; Inflation; HANK (search for similar items in EconPapers)
JEL-codes: E12 E31 E63 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:151:y:2025:i:c:s0304393225000030

DOI: 10.1016/j.jmoneco.2025.103732

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