A comparison of monetary policy rules in a HANK model

Michael Dobrew, Rafael Gerke, Sebastian Giesen and Joost Röttger

No 02/2021, Technical Papers from Deutsche Bundesbank

Abstract: This paper provides a comparison of monetary policy rules with make-up and/or asymmetric elements for a heterogeneous agent New Keynesian (HANK) model. The model features incomplete financial markets, nominal price and wage rigidities, rational expectations, an occasionally binding effective lower bound (ELB) on the short-term nominal interest rate as well as aggregate demand and cost-push shocks. Simulations show that symmetric policy rules with make-up elements can substantially lower the downward inflation bias induced by the ELB and reduce macroeconomic volatility. Asymmetric policy rules can address the downward inflation bias as well but lead to a substantial overshooting of the inflation target if they also feature make-up elements. The predictions of the HANK model for the considered policy rules are close to those obtained for a corresponding (representative agent) model version with complete markets.

Keywords: Monetary Policy; HANK; Household Heterogeneity; Effective Lower Bound; Make-Up Strategies; Asymmetric Policy Rules; Inequality (search for similar items in EconPapers)
JEL-codes: D31 E21 E31 E52 E58 J31 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubtps:283325

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