Precautionary saving and un-anchored expectations

Alex Grimaud

MPRA Paper from University Library of Munich, Germany

Abstract: This paper investigates monetary policy in a heterogeneous agent new Keynesian (HANK) model where agents face idiosyncratic income risk and use adaptive learning in order to form their expectations. Households experience different histories and observe different idiosyncratic variables. This gives rise to idiosyncratic learning processes, which naturally implies the existence of heterogeneous expectations. In HANK models, supply shocks generate precautionary saving. The learning setup amplifies this effect and can result in long-lasting disinflationary traps. Dovish Taylor rules focused on closing the output gap dampen the learning effects. Price level targeting improves the inflation and output stabilization trade-off by better anchoring expectations.

Keywords: Adaptive learning; precautionary saving; restricted perception equilibrium heterogeneous expectations; heterogeneous agents (search for similar items in EconPapers)
JEL-codes: E25 E31 E52 (search for similar items in EconPapers)
Date: 2021-07-05
New Economics Papers: this item is included in nep-dge, nep-mac, nep-mon, nep-ore and nep-upt
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Related works:
Working Paper: Precautionary saving and un-anchored expectations (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:110651

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