Global Indeterminacy in HANK Economies

Sushant Acharya and Jess Benhabib

No 32462, NBER Working Papers from National Bureau of Economic Research, Inc

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. In fact, we prove that multiple bounded-equilibria exist, no matter how strongly monetary policy responds to changes in inflation. Neither inertial rules nor rules which respond to output-gap fluctuations can resolve this indeterminacy. Instead, to implement a unique equilibrium, policy must stabilize endogenous natural rate fluctuations.

JEL-codes: E31 (search for similar items in EconPapers)
Date: 2024-05
New Economics Papers: this item is included in nep-cba and nep-dge
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Working Paper: Global Indeterminacy in HANK economies (2024)
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