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Global Indeterminacy in HANK Economies

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  • Sushant Acharya
  • Jess Benhabib

Abstract

We show that in Heterogeneous-Agent New-Keynesian (HANK) economies with countercyclical risk the natural interest rate is endogenous and co-moves with output, leaving the economy susceptible to self-fulfilling fluctuations. Unlike in Representative-Agent New-Keynesian models, the Taylor principle is not sufficient to guarantee uniqueness of equilibrium in HANK if risk is even mildly countercyclical. In fact, we prove that multiple bounded-equilibria exist, no matter how strongly monetary policy responds to changes in inflation. Neither inertial rules nor rules which respond to output-gap fluctuations can resolve this indeterminacy. Instead, to implement a unique equilibrium, policy must stabilize endogenous natural rate fluctuations.

Suggested Citation

  • Sushant Acharya & Jess Benhabib, 2024. "Global Indeterminacy in HANK Economies," NBER Working Papers 32462, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:32462
    Note: EFG ME
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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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