IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/14429.html
   My bibliography  Save this paper

Optimal Monetary Policy According to HANK

Author

Listed:
  • Acharya, Sushant
  • CHALLE, Edouard
  • Dogra, Keshav

Abstract

We study optimal monetary policy in an analytically tractable Heterogeneous Agent New Keynesian model with rich cross-sectional heterogeneity. Optimal policy differs from that in a representative agent model because monetary policy can affect consumption inequality, both by reducing idiosyncratic consumption risk and by reducing inequality arising from households' unequal exposures to aggregate shocks. Simple target criteria summarize the planner's tradeoff between consumption inequality, productive efficiency and price stability. Mitigating consumption inequality requires putting some weight on stabilizing the level of output, and correspondingly reducing the weights on the output gap and the price level relative to an economy without inequality.

Suggested Citation

  • Acharya, Sushant & CHALLE, Edouard & Dogra, Keshav, 2020. "Optimal Monetary Policy According to HANK," CEPR Discussion Papers 14429, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:14429
    as

    Download full text from publisher

    File URL: https://cepr.org/publications/DP14429
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Pierpaolo Benigno & Michael Woodford, 2005. "Inflation Stabilization And Welfare: The Case Of A Distorted Steady State," Journal of the European Economic Association, MIT Press, vol. 3(6), pages 1185-1236, December.
    2. Caballero, Ricardo J., 1990. "Consumption puzzles and precautionary savings," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 113-136, January.
    3. Florin Bilbiie & Xavier Ragot, 2021. "Optimal Monetary Policy and Liquidity with Heterogeneous Households," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 41, pages 71-95, July.
    4. Tobias Broer & Niels-Jakob Harbo Hansen & Per Krusell & Erik Öberg, 2020. "The New Keynesian Transmission Mechanism: A Heterogeneous-Agent Perspective," Review of Economic Studies, Oxford University Press, vol. 87(1), pages 77-101.
    5. Mumtaz, Haroon & Theophilopoulou, Angeliki, 2017. "The impact of monetary policy on inequality in the UK. An empirical analysis," European Economic Review, Elsevier, vol. 98(C), pages 410-423.
    6. Andreas Fagereng & Luigi Guiso & Luigi Pistaferri, 2017. "Firm-Related Risk and Precautionary Saving Response," American Economic Review, American Economic Association, vol. 107(5), pages 393-397, May.
    7. Calvet, Laurent E., 2001. "Incomplete Markets and Volatility," Journal of Economic Theory, Elsevier, vol. 98(2), pages 295-338, June.
    8. Isabel Correia & Juan Pablo Nicolini & Pedro Teles, 2008. "Optimal Fiscal and Monetary Policy: Equivalence Results," Journal of Political Economy, University of Chicago Press, vol. 116(1), pages 141-170, February.
    9. Angeletos, George-Marios & Calvet, Laurent-Emmanuel, 2006. "Idiosyncratic production risk, growth and the business cycle," Journal of Monetary Economics, Elsevier, vol. 53(6), pages 1095-1115, September.
    10. 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.
    11. Anmol Bhandari & David Evans & Mikhail Golosov & Thomas J. Sargent, 2018. "Inequality, Business Cycles, and Monetary-Fiscal Policy," NBER Working Papers 24710, National Bureau of Economic Research, Inc.
    12. Jordi Galí & J. David López-Salido & Javier Vallés, 2007. "Understanding the Effects of Government Spending on Consumption," Journal of the European Economic Association, MIT Press, vol. 5(1), pages 227-270, March.
    13. 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.
    14. Olivier Blanchard & Jordi Galí, 2007. "Real Wage Rigidities and the New Keynesian Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(s1), pages 35-65, February.
    15. 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.
    16. Iván Werning, 2015. "Incomplete Markets and Aggregate Demand," NBER Working Papers 21448, National Bureau of Economic Research, Inc.
    17. Sushant Acharya & Keshav Dogra, 2020. "Understanding HANK: Insights From a PRANK," Econometrica, Econometric Society, vol. 88(3), pages 1113-1158, May.
    18. Makoto Nakajima & Vladimir Smirnyagin, 2019. "Cyclical Labor Income Risk," Opportunity and Inclusive Growth Institute Working Papers 22, Federal Reserve Bank of Minneapolis.
    19. Morten O Ravn & Vincent Sterk, 2021. "Macroeconomic Fluctuations with HANK & SAM: an Analytical Approach," Journal of the European Economic Association, European Economic Association, vol. 19(2), pages 1162-1202.
    20. Adrien Auclert, 2019. "Monetary Policy and the Redistribution Channel," American Economic Review, American Economic Association, vol. 109(6), pages 2333-2367, June.
    21. Cagetti, Marco, 2003. "Wealth Accumulation over the Life Cycle and Precautionary Savings," Journal of Business & Economic Statistics, American Statistical Association, vol. 21(3), pages 339-353, July.
    22. Calvo, Guillermo A & Obstfeld, Maurice, 1988. "Optimal Time-Consistent Fiscal Policy with Finite Lifetimes," Econometrica, Econometric Society, vol. 56(2), pages 411-432, March.
    23. Christian Bayer & Ralph Luetticke, 2019. "Shocks, Frictions, and Inequality in US Business Cycles," 2019 Meeting Papers 256, Society for Economic Dynamics.
    24. 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 May 2021.
    25. Dimitris Christelis & Dimitris Georgarakos & Tullio Jappelli & Maarten van Rooij, 2020. "Consumption Uncertainty and Precautionary Saving," The Review of Economics and Statistics, MIT Press, vol. 102(1), pages 148-161, March.
    26. Den Haan, Wouter J. & Rendahl, Pontus & Riegler, Markus, 2018. "Unemployment (fears) and deflationary spirals," LSE Research Online Documents on Economics 84625, London School of Economics and Political Science, LSE Library.
    27. Wouter J Den Haan & Pontus Rendahl & Markus Riegler, 2018. "Unemployment (Fears) and Deflationary Spirals," Journal of the European Economic Association, European Economic Association, vol. 16(5), pages 1281-1349.
    28. Wouter Den Haan & Pontus Rendahl & Markus Riegler, 2015. "Unemployment (Fears) and Deflationary Spirals," Discussion Papers 1521, Centre for Macroeconomics (CFM).
    29. Greg Kaplan & Giovanni L. Violante & Justin Weidner, 2014. "The Wealthy Hand-to-Mouth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 45(1 (Spring), pages 77-153.
    30. Neng Wang, 2003. "Caballero Meets Bewley: The Permanent-Income Hypothesis in General Equilibrium," American Economic Review, American Economic Association, vol. 93(3), pages 927-936, June.
    31. Kjetil Storesletten & Chris I. Telmer & Amir Yaron, 2004. "Cyclical Dynamics in Idiosyncratic Labor Market Risk," Journal of Political Economy, University of Chicago Press, vol. 112(3), pages 695-717, June.
    32. Ravn, Morten O. & Sterk, Vincent, 2017. "Job uncertainty and deep recessions," Journal of Monetary Economics, Elsevier, vol. 90(C), pages 125-141.
    33. Coibion, Olivier & Gorodnichenko, Yuriy & Kueng, Lorenz & Silvia, John, 2017. "Innocent Bystanders? Monetary policy and inequality," Journal of Monetary Economics, Elsevier, vol. 88(C), pages 70-89.
    34. Morten O Ravn & Vincent Sterk, 0. "Macroeconomic Fluctuations with HANK & SAM: an Analytical Approach," Journal of the European Economic Association, European Economic Association, vol. 19(2), pages 1162-1202.
    35. Edouard Challe, 2020. "Uninsured Unemployment Risk and Optimal Monetary Policy in a Zero-Liquidity Economy," American Economic Journal: Macroeconomics, American Economic Association, vol. 12(2), pages 241-283, April.
    36. Julio J. Rotemberg, 1982. "Monopolistic Price Adjustment and Aggregate Output," Review of Economic Studies, Oxford University Press, vol. 49(4), pages 517-531.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sushant Acharya & Keshav Dogra, 2020. "Understanding HANK: Insights From a PRANK," Econometrica, Econometric Society, vol. 88(3), pages 1113-1158, May.
    2. Bilbiie, Florin O., 2020. "The New Keynesian cross," Journal of Monetary Economics, Elsevier, vol. 114(C), pages 90-108.
    3. Cantore, Cristiano & Freund, Lukas B., 2021. "Workers, capitalists, and the government: fiscal policy and income (re)distribution," Journal of Monetary Economics, Elsevier, vol. 119(C), pages 58-74.
    4. Daeha Cho, 2023. "Unemployment risk, MPC heterogeneity, and business cycles," Quantitative Economics, Econometric Society, vol. 14(2), pages 717-751, May.
    5. Oliver Pfäuti & Fabian Seyrich, 2022. "A Behavioral Heterogeneous Agent New Keynesian Model," Discussion Papers of DIW Berlin 1995, DIW Berlin, German Institute for Economic Research.
    6. Alisdair McKay & Ricardo Reis, 2021. "Optimal Automatic Stabilizers [Consumption versus Expenditure]," Review of Economic Studies, Oxford University Press, vol. 88(5), pages 2375-2406.
    7. Bilbiie, F. & Primiceri, G. E. & Tambalotti, A., 2022. "Inequality and Business Cycles," Cambridge Working Papers in Economics 2275, Faculty of Economics, University of Cambridge.
    8. Bilbiie, Florin O. & Känzig, Diego R. & Surico, Paolo, 2022. "Capital and income inequality: An aggregate-demand complementarity," Journal of Monetary Economics, Elsevier, vol. 126(C), pages 154-169.
    9. Edouard Djeutem & Mario He & Abeer Reza & Yang Zhang, 2022. "Household Heterogeneity and the Performance of Monetary Policy Frameworks," Staff Working Papers 22-12, Bank of Canada.
    10. Florin Bilbiie & Xavier Ragot, 2021. "Optimal Monetary Policy and Liquidity with Heterogeneous Households," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 41, pages 71-95, July.
    11. 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.
    12. Felipe Alves & Greg Kaplan & Benjamin Moll & Giovanni L. Violante, 2020. "A Further Look at the Propagation of Monetary Policy Shocks in HANK," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(S2), pages 521-559, December.
    13. Galo Nuño & Carlos Thomas, 2020. "Optimal Monetary Policy with Heterogeneous Agents," CESifo Working Paper Series 8670, CESifo.
    14. repec:hal:wpspec:info:hdl:2441/j75mfllkr89c8aod1nr586ksc is not listed on IDEAS
    15. Euiyoung Jung, 2021. "On the design of labor market programs as stabilization policies," PSE Working Papers halshs-03243698, HAL.
    16. Mr. Niels-Jakob H Hansen & Alessandro Lin & Rui Mano, 2020. "Should Inequality Factor into Central Banks' Decisions?," IMF Working Papers 2020/196, International Monetary Fund.
    17. Bilbiie, Florin, 2018. "Monetary Policy and Heterogeneity: An Analytical Framework," CEPR Discussion Papers 12601, C.E.P.R. Discussion Papers.
    18. 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.
    19. 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.
    20. Euiyoung Jung, 2021. "On the design of labor market programs as stabilization policies," Working Papers halshs-03243698, HAL.
    21. repec:hal:spmain:info:hdl:2441/j75mfllkr89c8aod1nr586ksc is not listed on IDEAS
    22. Tao Wang, 2023. "Perceived versus Calibrated Income Risks in Heterogeneous-Agent Consumption Models," Staff Working Papers 23-59, Bank of Canada.

    More about this item

    Keywords

    New keynesian model; Incomplete markets; Optimal monetary policy;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • 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
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:14429. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://www.cepr.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.