Optimal Monetary Policy with Heterogeneous Agents: Discretion, Commitment, and Timeless Policy

Eduardo Davila and Andreas Schaab

No 30961, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper characterizes optimal monetary policy in a canonical heterogeneous-agent New Keynesian (HANK) model with wage rigidity. Under discretion, a utilitarian planner faces the incentive to redistribute towards indebted, high marginal utility households, which is a new source of inflationary bias. With commitment, i) zero inflation is the optimal long-run policy, ii) time-consistent policy requires both inflation and distributional penalties, and iii) the planner trades off aggregate stabilization against distributional considerations, so Divine Coincidence fails. We compute optimal stabilization policy in response to productivity, demand, and cost-push shocks using sequence-space methods, which we extend to Ramsey problems and welfare analysis.

JEL-codes: E52 E61 (search for similar items in EconPapers)
Date: 2023-02
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mon and nep-upt
Note: EFG ME
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