Monetary Policy According to HANK

Greg Kaplan, Benjamin Moll and Giovanni L. Violante
Additional contact information
Giovanni L. Violante: Princeton University, CEPR and NBER (E-mail: glv2@princeton.edu)

No 17-E-04, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: We revisit the transmission mechanism of monetary policy for household consumption in a Heterogeneous Agent New Keynesian (HANK) model. The model yields empirically realistic distributions of wealth and marginal propensities to consume because of two features: uninsurable income shocks and multiple assets with different degrees of liquidity and different returns. In this environment, the indirect effects of an unexpected cut in interest rates, which operate through a general equilibrium increase in labor demand, far outweigh direct effects such as intertemporal substitution. This finding is in stark contrast to small- and medium-scale Representative Agent New Keynesian (RANK) economies, where the substitution channel drives virtually all of the transmission from interest rates to consumption. Failure of Ricardian equivalence implies that, in HANK models, the fiscal reaction to the monetary expansion is a key determinant of the overall size of the macroeconomic response.

Keywords: Monetary Policy; Heterogeneous Agents; New Keynesian; Consumption; Liquidity; Inequality (search for similar items in EconPapers)
JEL-codes: D14 D31 E21 E52 (search for similar items in EconPapers)
Date: 2017-06
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

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Related works:
Journal Article: Monetary Policy According to HANK (2018)
Working Paper: Monetary Policy According to HANK (2016)
Working Paper: Monetary Policy According to HANK (2016)
Working Paper: Monetary policy according to HANK (2016)
Working Paper: Monetary Policy According to HANK (2016)
Working Paper: Monetary Policy According to HANK (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:ime:imedps:17-e-04

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