Aggregate uncertainty, HANK, and the ZLB

Alessandro Lin () and Marcel Peruffo ()
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Alessandro Lin: Bank of Italy
Marcel Peruffo: University of Sydney

No 1442, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We propose a novel methodology for solving Heterogeneous Agent New Keynesian (HANK) models with aggregate uncertainty and the Zero Lower Bound (ZLB) on nominal interest rates. Our efficient solution strategy combines the sequence-state Jacobian methodology in Auclert et al. (2021) with a tractable structure for aggregate uncertainty by means of a two-regime shock structure. We apply the method to a simple HANK model to show that: 1) in the presence of aggregate non-linearities such as the ZLB, a dichotomy emerges between the aggregate impulse responses under aggregate uncertainty against the deterministic case; 2) aggregate uncertainty amplifies downturns at the ZLB, and household heterogeneity increases the extent of this amplification; and 3) the effects of forward guidance are stronger when there is aggregate uncertainty.

Keywords: monetary policy; new Keynesian model; HANK; liquidity traps; Zero Lower Bound; computational methods (search for similar items in EconPapers)
JEL-codes: D14 E44 E52 E58 (search for similar items in EconPapers)
Date: 2024-03
New Economics Papers: this item is included in nep-ban, nep-dge, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1442_24

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