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Aggregate uncertainty, HANK, and the ZLB

Author

Listed:
  • Alessandro Lin

    (Bank of Italy)

  • Marcel Peruffo

    (University of Sydney)

Abstract

We propose a novel methodology for solving Heterogeneous Agent New Keynesian (HANK) models with aggregate uncertainty and the Zero Lower Bound (ZLB) on nominal interest rates. Our efficient solution strategy combines the sequence-state Jacobian methodology in Auclert et al. (2021) with a tractable structure for aggregate uncertainty by means of a two-regime shock structure. We apply the method to a simple HANK model to show that: 1) in the presence of aggregate non-linearities such as the ZLB, a dichotomy emerges between the aggregate impulse responses under aggregate uncertainty against the deterministic case; 2) aggregate uncertainty amplifies downturns at the ZLB, and household heterogeneity increases the extent of this amplification; and 3) the effects of forward guidance are stronger when there is aggregate uncertainty.

Suggested Citation

  • Alessandro Lin & Marcel Peruffo, 2024. "Aggregate uncertainty, HANK, and the ZLB," Temi di discussione (Economic working papers) 1442, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1442_24
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    File URL: https://www.bancaditalia.it/pubblicazioni/temi-discussione/2024/2024-1442/en_tema_1442.pdf
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    More about this item

    Keywords

    monetary policy; new Keynesian model; HANK; liquidity traps; Zero Lower Bound; computational methods;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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