Optimal Monetary Policy in HANK Economies

Sushant Acharya, Edouard Challe and Keshav Dogra

No 381, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: In this paper, we study the positive and normative implications for monetary policy of cross-sectional wealth dispersion due to uninsured, idiosyncratic labor-income risk. To this purpose we develop a tractable Heterogenous-Agent New Keynesian (HANK) model based on CARA (Constant Absolute Risk Aversion) utility functions and Normally distributed labor-income risk. The distributions of wealth, earnings and consumptions, as well as their dynamics over time, can be solved in closed form, which informs us about the precise impact of monetary policy on those cross-sectional distributions. The Social Welfare Function (SWF) that aggregates agents utility can also be solved in closed form. Besides its usual determinants, the optimal policy response to aggregate shocks gives a central role to (i) the redistribution of wealth through inflation (as emphasized by Bhandari et al., 2018), and (ii) the impact of policy on the marginal propensity to consume out of wealth, which determines the pass-through from income risk to consumption risk

Date: 2019
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:381

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