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Macroeconomic fluctuations with HANK & SAM: an analytical approach

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  • Ravn, Morten O.
  • Sterk, Vincent

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 ñdue the interaction between incomplete markets, sticky prices and endogenous unemployment risk ñproductivity shocks may have radically di§erent e§ects than in traditional NK models, that the Taylor principle may fail, and that pessimistic beliefs may be self-fulÖlling and move the economy into temporary episodes of low demand and high unemployment, as well as into a long-lasting ìunemployment trapî. At the Zero Lower Bound, the presence of endogenous unemployment risk can create ináation and overturn paradoxical properties of the model. We further study Önancial asset prices and show that non-negligible risk premia emerge.

Suggested Citation

  • Ravn, Morten O. & Sterk, Vincent, 2016. "Macroeconomic fluctuations with HANK & SAM: an analytical approach," LSE Research Online Documents on Economics 86177, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:86177
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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. Cui, Wei & Sterk, Vincent, 2018. "Quantitative Easing," CEPR Discussion Papers 13322, C.E.P.R. Discussion Papers.
    7. Fabio Ghironi, 2018. "Macro needs micro," Oxford Review of Economic Policy, Oxford University Press, vol. 34(1-2), pages 195-218.
    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. Bilbiie, Florin Ovidiu & Ragot, Xavier, 2017. "Optimal Monetary Policy and Liquidity with Heterogeneous Households," CEPR Discussion Papers 11814, C.E.P.R. Discussion Papers.
    10. 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.
    11. Wei Cui & Vincent Sterk, 2018. "Quantitative Easing," Discussion Papers 1830, Centre for Macroeconomics (CFM).
    12. 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.
    13. Edouard Challe, 2017. "Uninsured Unemployment Risk and Optimal Monetary Policy," Working Papers 2017-54, Center for Research in Economics and Statistics.
    14. 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.
    15. 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.
    16. 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.
    17. Vincent Sterk & Wei Cui, 2019. "Quantitative Easing," 2019 Meeting Papers 29, Society for Economic Dynamics.
    18. 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.
    19. 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.
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    More about this item

    Keywords

    Sticky prices; incomplete asset markets; matching frictions; multiple equilibria; amplication;

    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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