Optimal Monetary Policy According to HANK

Sushant Acharya, Edouard Challe and Keshav Dogra

No 916, Staff Reports from Federal Reserve Bank of New York

Abstract: We study optimal monetary policy in a heterogeneous agent new Keynesian economy. A utilitarian planner seeks to reduce consumption inequality, in addition to stabilizing output gaps and inflation. The planner does so both by reducing income risk faced by households, and by reducing the pass-through from income to consumption risk, trading off the benefits of lower inequality against productive inefficiency and higher inflation. When income risk is countercyclical, policy curtails the fall in output in recessions to mitigate the increase in inequality. We uncover a new form of time inconsistency of the Ramsey plan—the temptation to exploit households' unhedged interest rate exposure to lower inequality.

Keywords: New Keynesian models; optimal monetary policy; incomplete markets (search for similar items in EconPapers)
JEL-codes: E21 E30 E52 E62 (search for similar items in EconPapers)
Date: 2020-02-01
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Citations: View citations in EconPapers (15)

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Journal Article: Optimal Monetary Policy According to HANK (2023)
Working Paper: Optimal Monetary Policy According to HANK (2023)
Working Paper: Optimal Monetary Policy According to HANK (2023)
Working Paper: Optimal Monetary Policy According to HANK (2021)
Working Paper: Optimal Monetary Policy According to HANK (2020)
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