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HANK meets Ramsey: Optimal Coordination of Monetary and Labor Market Policies

Nils Mattis Gornemann
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Nils Mattis Gornemann: International Finance Board of Governors

No 1252, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: We study the design of coordinated labor market and monetary policy in a heterogeneous agent model with incomplete markets, search frictions, and nominal rigidities. We allow for self-insurance through savings and moral hazard in search behavior. In such a model a rise in labor market risk during a recession causes an increase in desired precautionary savings by households leading to a fall in aggregate demand which amplifies the initial downturn. Increasing unemployment benefits or cutting interest rates can both help to counteract this amplification effect. Therefore, gains from coordinating policies arise which are the focus of our analysis. Extending recent methods for the solution of heterogeneous agent models with aggregate risk we solve a sequence of Ramsey problems with a varying sets of policy instruments in this economy to quantify the effects of policy coordination and optimal policy behavior over the business cycle.

New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
Date: 2018
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