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Monetary policy transmission with endogenous central bank responses in TANK

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Listed:
  • Maliar, Lilia
  • Naubert, Christopher

Abstract

We study how the transmission of monetary policy innovations is affected by the endogenous response of the central bank to macroeconomic aggregates in a two-agent New Keynesian model. We focus on how the stance of monetary policy and the fraction of savers in the economy affect transmission. We show that the indirect effect of an innovation is negative when the indirect real rate effect exceeds the indirect income effect. The relative magnitude of the indirect real rate effect increases with the share of savers and the strength of the central bank's response and decreases with the horizon of the innovation.

Suggested Citation

  • Maliar, Lilia & Naubert, Christopher, 2025. "Monetary policy transmission with endogenous central bank responses in TANK," Journal of Economic Dynamics and Control, Elsevier, vol. 178(C).
    • Handle: RePEc:eee:dyncon:v:178:y:2025:i:c:s0165188925001125
    DOI: 10.1016/j.jedc.2025.105146
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    References listed on IDEAS

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    1. García, Benjamín & Giarda, Mario & Lizama, Carlos & Rojas, Ignacio, 2024. "Transmission mechanisms in HANK: An application to Chile," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 5(3).
    2. Bilbiie, Florin O., 2008. "Limited asset markets participation, monetary policy and (inverted) aggregate demand logic," Journal of Economic Theory, Elsevier, vol. 140(1), pages 162-196, May.
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    4. Ralph Luetticke, 2021. "Transmission of Monetary Policy with Heterogeneity in Household Portfolios," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(2), pages 1-25, April.
    5. Eunseong Ma, 2023. "Monetary Policy And Inequality: How Does One Affect The Other?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(2), pages 691-725, May.
    6. Rohan Kekre & Moritz Lenel, 2022. "Monetary Policy, Redistribution, and Risk Premia," Econometrica, Econometric Society, vol. 90(5), pages 2249-2282, September.
    7. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    8. Adrien Auclert, 2019. "Monetary Policy and the Redistribution Channel," American Economic Review, American Economic Association, vol. 109(6), pages 2333-2367, June.
    9. Maliar, Lilia & Taylor, John B., 2024. "Odyssean forward guidance in normal times," Journal of Economic Dynamics and Control, Elsevier, vol. 165(C).
    10. Greg Kaplan & Benjamin Moll & Giovanni L. Violante, 2018. "Monetary Policy According to HANK," American Economic Review, American Economic Association, vol. 108(3), pages 697-743, March.
    11. Bilbiie, Florin O., 2020. "The New Keynesian cross," Journal of Monetary Economics, Elsevier, vol. 114(C), pages 90-108.
    12. Christina Patterson, 2023. "The Matching Multiplier and the Amplification of Recessions," American Economic Review, American Economic Association, vol. 113(4), pages 982-1012, April.
    13. Martin B. Holm, 2023. "Monetary transmission with income risk," Scandinavian Journal of Economics, Wiley Blackwell, vol. 125(2), pages 441-460, April.
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    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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