Monetary Policy and Labor Market Friction in a HANK Model

I develop a two-asset heterogeneous-agent New Keynesian model with search and matching frictions in the labor market, which extends the transmission mechanism of monetary policy to household consumption. Uninsurable countercyclical unemployment risk plays a crucial role in the transmission of monetary shocks to consumption through a novel channel driven by countercyclical precautionary saving motives. Following an increase in the real interest rate, unconstrained households raise their liquid savings and reduce current consumption to insure against the risk of lower future individual labor income, resulting from longer expected unemployment durations. This mechanism accounts for 16 % of the total decline in consumption in a model calibrated to a realistic wealth distribution. The strength of the countercyclical precautionary saving motive depends on the degree of wage rigidity and the fiscal policy rule in general equilibrium. Additionally, I extend the sequence-space Jacobian algorithm to a continuous-time framework, where the efficiency of constructing partial equilibrium Jacobians is enhanced by a generalized approach to handling a large number of income grid points in the heterogeneous-agent block.