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Monetary Policy According to HANK

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Listed author(s):
  • Kaplan, Greg
  • Moll, Benjamin
  • Violante, Giovanni L.

Abstract

We revisit the transmission mechanism of monetary policy for household consumption in a Heterogeneous Agent New Keynesian (HANK) model. The model yields empirically realistic distributions of household wealth and marginal propensities to consume because of two key features: multiple assets with different degrees of liquidity and an idiosyncratic income process with leptokurtic income changes. In this environment, the indirect effects of an unexpected cut in interest rates, which operate through a general equilibrium increase in labor demand, far outweigh direct effects such as intertemporal substitution. This finding is in stark contrast to small- and medium-scale Representative Agent New Keynesian (RANK) economies, where intertemporal substitution drives virtually all of the transmission from interest rates to consumption.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 11068.

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Date of creation: Jan 2016
Handle: RePEc:cpr:ceprdp:11068
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Keywords: consumption; earnings kurtosis; heterogeneous agents; inequality; liquidity; monetary policy; New Keynesian;

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Find related papers by JEL classification:
  • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
  • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
  • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
  • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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