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Complementarity, Heterogeneity, and Multipliers: Utility for HANK

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  • Bilbiie, F. O.
  • Hanks, F.
  • Lavender, S.

Abstract

Complementarity between consumption and work is essential for heterogeneous-agent models' ability to generate realistic multiplier effects from aggregate demand shocks, while avoiding puzzling predictions. We show how parameterizing complementarity - in the spirit of Frisch's utility acceleration"- separately from income effects is necessary to achieve both. HANK models equipped with such complementarity deliver plausible fiscal multipliers and simultaneously resolve two key challenges in the literature: a "trilemma" of matching marginal propensities to earn (MPEs) and to consume (MPCs), and a Catch-22 "dilemmac of resolving the forward guidance puzzle. We establish these results analytically in a tractable HANK framework and confirm them in a calibrated quantitative HANK model. Standard utility functions, however, constrain either complementarity or income effects - or both - thereby forcing multipliers to depend exclusively on one or the other. We introduce two flexible parametric forms that allow arbitrary, independent calibration of complementarity and income effects: a quasi-separable "GHH-CRRA" utility and a "CCRRA" (constant complementarity and relative risk aversion) specification.

Suggested Citation

  • Bilbiie, F. O. & Hanks, F. & Lavender, S., 2025. "Complementarity, Heterogeneity, and Multipliers: Utility for HANK," Janeway Institute Working Papers 2531, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camjip:2531
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    Keywords

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    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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