HANK beyond FIRE: Amplification, forward guidance, and belief shocks

José-Elías Gallegos

No 2418, Working Papers from Banco de España

Abstract: The transmission channel of monetary policy in the benchmark New Keynesian (NK) framework relies on the counterfactual Full Information Rational Expectations (FIRE) assumption, particularly at the general equilibrium (GE) dimension. I relax the Full Information assumption and build a Heterogeneous-Agents NK model under financial frictions and dispersed information. I find that the amplification multiplier of monetary policy is dampened by the lessened role of GE effects. I then conduct the standard full-fledged NK analysis: the determinacy region is widened as a result of as if aggregate myopia, and the framework beyond FIRE does not suffer from the forward guidance puzzle. Finally, I find that transitory “animal spirits” shocks generate persistent effects.

Keywords: imperfect information; New Keynesian; heterogeneous agents; monetary policy (search for similar items in EconPapers)
JEL-codes: E31 E43 E52 E71 (search for similar items in EconPapers)
Pages: 75 pages
Date: 2024-05
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2418

DOI: 10.53479/36653

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