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Self-fulfilling fluctuations in HANK economies

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Listed:
  • 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 sus-ceptible 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: multiple bounded-equilibria exist, no matter how strongly monetary policy responds to changes in inflation. For an active-monetary policy to eliminate self-fulfilling fluctua-tions, it must stabilize the endogenous natural rate fluctuations. Alternatively, a passive-monetary and active-fiscal regime can also eliminate equilibrium multiplicity.

Suggested Citation

  • Sushant Acharya & Jess Benhabib, 2024. "Self-fulfilling fluctuations 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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