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New Keynesian Economics with Household and Firm Heterogeneity

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  • Winberry, Thomas
  • Auclert, Adrien
  • Rognlie, Matthew
  • Straub, Ludwig

Abstract

The Heterogeneous-Agent New Keynesian literature has revisited the transmission of monetary and fiscal policy to consumption using models where heterogeneous households face idiosyncratic income risk and borrowing constraints. We show that the key lessons from this literature also apply to investment using a model where heterogeneous firms face idiosyncratic productivity risk and financial frictions: constrained firms' investment depends on their free cash flow, generating indirect effects of monetary policy and implying that transfer payments stimulate investment demand. Quantitatively, the strength of these new mechanisms is governed by firms' marginal propensities to invest (MPIs), similar to the role of marginal propensities to consume (MPCs) for households. But unlike MPCs, we currently lack quasi-experimental evidence about MPIs that we can use to directly discipline the new mechanisms.

Suggested Citation

  • Winberry, Thomas & Auclert, Adrien & Rognlie, Matthew & Straub, Ludwig, 2025. "New Keynesian Economics with Household and Firm Heterogeneity," CEPR Discussion Papers 20976, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:20976
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    References listed on IDEAS

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    2. Chen, Huafeng (Jason) & Chen, Shaojun (Jenny), 2012. "Investment-cash flow sensitivity cannot be a good measure of financial constraints: Evidence from the time series," Journal of Financial Economics, Elsevier, vol. 103(2), pages 393-410.
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    6. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
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    Keywords

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    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • D2 - Microeconomics - - Production and Organizations
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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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