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Macroeconomic Fluctuations with HANK & SAM: An Analytical Approach

Author

Listed:
  • Morten O. Ravn

    () (University College London (UCL)
    Centre for Macroeconomics (CFM))

  • Vincent Sterk

    () (University College London (UCL)
    Centre for Macroeconomics (CFM))

Abstract

New Keynesian models with unemployment and incomplete markets are rapidly becoming a new workhorse model in macroeconomics. Such models typically require heavy computational methods which may obscure intuition and overlook equilibria. We present a tractable version which can be characterized analytically. Our results highlight that - due the interaction between incomplete markets, sticky prices and endogenous unemployment risk - productivity shocks may have radically different effects than in traditional NK models, that the Taylor principle may fail, and that pessimistic beliefs may be self-fulfilling and move the economy into temporary episodes of low demand and high unemployment, as well as into a long-lasting "unemployment trap". At the Zero Lower Bound, the presence of endogenous unemployment risk can create inflation and overturn paradoxical properties of the model. We further study financial asset prices and show that non-negligible risk premia emerge.

Suggested Citation

  • Morten O. Ravn & Vincent Sterk, 2016. "Macroeconomic Fluctuations with HANK & SAM: An Analytical Approach," Discussion Papers 1633, Centre for Macroeconomics (CFM).
  • Handle: RePEc:cfm:wpaper:1633
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    1. Macroeconomic Fluctuations with HANK & SAM: an Analytical Approach
      by Christian Zimmermann in NEP-DGE blog on 2017-12-09 04:10:30

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    Cited by:

    1. Ansgar Rannenberg, 2019. "Inequality, the risk of secular stagnation and the increase in household deb," Working Paper Research 375, National Bank of Belgium.
    2. Emmanuel Farhi & Iván Werning, 2019. "Monetary Policy, Bounded Rationality, and Incomplete Markets," American Economic Review, American Economic Association, vol. 109(11), pages 3887-3928, November.
    3. Cui, Wei & Sterk, Vincent, 2018. "Quantitative easing," LSE Research Online Documents on Economics 90874, London School of Economics and Political Science, LSE Library.
    4. Davide Debortoli & Jordi Galí, 2017. "Monetary policy with heterogeneous agents: Insights from TANK models," Economics Working Papers 1686, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2018.
    5. Nurdaulet Abilov, 2020. "An Estimated Bayesian DSGE Model for Kazakhstan," Asian Journal of Economic Modelling, Asian Economic and Social Society, vol. 8(1), pages 30-54, March.
    6. Edouard Challe, 2017. "Uninsured Unemployment Risk and Optimal Monetary Policy," Working Papers 2017-54, Center for Research in Economics and Statistics.
    7. Florin Bilbiie & Xavier Ragot, 2017. "Optimal Monetary Policy and Liquidity with Heterogeneous Households," Sciences Po publications 2017-02, Sciences Po.
    8. Wendy Carlin & David Soskice, 2018. "Stagnant productivity and low unemployment: stuck in a Keynesian equilibrium," Oxford Review of Economic Policy, Oxford University Press, vol. 34(1-2), pages 169-194.
    9. Fabio Ghironi, 2018. "Macro needs micro," Oxford Review of Economic Policy, Oxford University Press, vol. 34(1-2), pages 195-218.
    10. Jordi Galí, 2018. "The State of New Keynesian Economics: A Partial Assessment," Journal of Economic Perspectives, American Economic Association, vol. 32(3), pages 87-112, Summer.
    11. Cui, Wei & Sterk, Vincent, 2018. "Quantitative Easing," CEPR Discussion Papers 13322, C.E.P.R. Discussion Papers.
    12. Chen, Siyan & Desiderio, Saul, 2018. "Computational evidence on the distributive properties of monetary policy," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 12, pages 1-32.
    13. Michael T. Kiley & John M. Roberts, 2017. "Monetary Policy in a Low Interest Rate World," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 48(1 (Spring), pages 317-396.
    14. Vincent Sterk & Wei Cui, 2019. "Quantitative Easing," 2019 Meeting Papers 29, Society for Economic Dynamics.
    15. Stefano Neri & Giuseppe Ferrero, 2017. "Monetary policy in a low interest rate environment," Questioni di Economia e Finanza (Occasional Papers) 392, Bank of Italy, Economic Research and International Relations Area.
    16. Adam, Felix & Matthes, Jürgen, 2018. "Zur Belastbarkeit von Forderungen nach expansiver Fiskalpolitik an der Nullzinsgrenze: Eine Kritik neukeynesianischer Modelle auf Basis einer Literaturanalyse," IW-Reports 7/2018, Institut der deutschen Wirtschaft (IW) / German Economic Institute.
    17. Andrea Colciago & Anna Samarina & Jakob de Haan, 2019. "Central Bank Policies And Income And Wealth Inequality: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 33(4), pages 1199-1231, September.
    18. Wei Cui & Vincent Sterk, 2018. "Quantitative Easing," Discussion Papers 1830, Centre for Macroeconomics (CFM).
    19. Behzad Diba & Olivier Loisel, 2019. "Pegging the Interest Rate on Bank Reserves: A Resolution of New Keynesian Puzzles and Paradoxes," Working Papers gueconwpa~19-19-05, Georgetown University, Department of Economics.
    20. Luigi Bocola & Guido Lorenzoni, 2017. "Financial Crises, Dollarization, and Lending of Last Resort in Open Economies," NBER Working Papers 23984, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Sticky prices; Incomplete asset markets; Matching frictions; Multiple equilibria; Amplification;

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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