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Monetary Policy According to HANK

Author

Listed:
  • Greg Kaplan

    (University of Chicago and NBER (E-mail: gkaplan@ uchicago.edu))

  • Benjamin Moll

    (Princeton University and NBER (E-mail: moll@princeton.edu))

  • Giovanni L. Violante

    (Princeton University, CEPR and NBER (E-mail: glv2@princeton.edu))

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 wealth and marginal propensities to consume because of two features: uninsurable income shocks and multiple assets with different degrees of liquidity and different returns. 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 the substitution channel drives virtually all of the transmission from interest rates to consumption. Failure of Ricardian equivalence implies that, in HANK models, the fiscal reaction to the monetary expansion is a key determinant of the overall size of the macroeconomic response.

Suggested Citation

  • Greg Kaplan & Benjamin Moll & Giovanni L. Violante, 2017. "Monetary Policy According to HANK," IMES Discussion Paper Series 17-E-04, Institute for Monetary and Economic Studies, Bank of Japan.
  • Handle: RePEc:ime:imedps:17-e-04
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    File URL: http://www.imes.boj.or.jp/research/papers/english/17-E-04.pdf
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    More about this item

    Keywords

    Monetary Policy; Heterogeneous Agents; New Keynesian; Consumption; Liquidity; Inequality;

    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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