Self-fulfilling fluctuations in HANK economies

Sushant Acharya and Jess Benhabib

No 19060, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We show that in Heterogeneous-Agent New-Keynesian (HANK) economies with countercyclical risk the natural interest rate is endogenous and co-moves with output, leaving the economy susceptible to self-fulfilling fluctuations. Unlike in Representative-Agent New-Keynesian models, the Taylor principle is not sufficient to guarantee uniqueness of equilibrium in HANK if risk is even mildly countercyclical: multiple bounded-equilibria exist, no matter how strongly monetary policy responds to changes in inflation. For an active-monetary policy to eliminate self-fulfilling fluctuations, it must stabilize the endogenous natural rate fluctuations. Alternatively, a passive-monetary and active-fiscal regime can also eliminate equilibrium multiplicity.

JEL-codes: E31 E4 E5 (search for similar items in EconPapers)
Date: 2024-05
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