Monetary Policy and Heterogeneity: An Analytical Framework

Florin Bilbiie

No 12601, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: THANK is a tractable heterogeneous-agent New-Keynesian model that captures analytically core micro-heterogeneity channels of quantitative-HANK: cyclical inequality and risk; self-insurance, precautionary saving, and realistic intertemporal marginal propensities to consume. I use it to elucidate key transmission mechanisms and dynamic properties of HANK models. Countercyclical inequality yields aggregate-demand amplification and makes determinacy with Taylor rules more stringent; but solving the forward guidance puzzle requires procyclical inequality: a Catch-22. Solutions include combining inequality with a distinct risk channel, with compensating cyclicalities; I provide evidence that disposable income inequality was procyclical in the last two, Great and COVID recessions, while risk is countercyclical. Alternative policy rules also solve the Catch-22, e.g. price-level-targeting or, in the model version with liquidity, setting nominal public debt. Optimal policy with heterogeneity features a novel inequality-stabilization motive generating higher inflation volatility---but is unaffected by risk, insofar as the target efficient equilibrium entails no inequality.

JEL-codes: E21 E31 E40 E44 E50 E52 E58 E60 E62 (search for similar items in EconPapers)
Date: 2018-01
New Economics Papers: this item is included in nep-dge
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Citations: View citations in EconPapers (45)

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Related works:
Journal Article: Monetary Policy and Heterogeneity: An Analytical Framework* (2025)
Working Paper: Monetary Policy and Heterogeneity: An Analytical Framework (2024)
Working Paper: Monetary Policy and Heterogeneity: An Analytical Framework (2019)
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