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Optimal Monetary Policy According to HANK

Sushant Acharya (), Edouard Challe () and Keshav Dogra

Staff Working Papers from Bank of Canada

Abstract: We study optimal monetary policy in an analytically tractable Heterogeneous Agent New Keynesian model with rich cross-sectional heterogeneity. Optimal policy differs from that in a representative agent model because monetary policy can affect consumption inequality by reducing both idiosyncratic consumption risk and the inequality that arises from households’ unequal exposures to aggregate shocks. Simple target criteria summarize the planner’s trade-off between consumption inequality, productive efficiency and price stability. Mitigating consumption inequality requires putting some weight on stabilizing the level of output and correspondingly reducing the weights on the output gap and the price level relative to an economy without inequality.

Keywords: Economic models; Monetary policy (search for similar items in EconPapers)
JEL-codes: E21 E30 E52 E63 (search for similar items in EconPapers)
Pages: 78 pages
Date: 2021-11
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Working Paper: Optimal Monetary Policy According to HANK (2020) Downloads
Working Paper: Optimal Monetary Policy According to HANK (2020) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:21-55

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