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Implications of Fiscal-Monetary Interaction from HANK Models

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  • Greg Kaplan

Abstract

I describe nine implications of the interconnectedness of fiscal and monetary policy that surface in Heterogeneous Agent New Keynesian (HANK) models. Not all are unique to HANK models. (i) Long run fiscal changes force monetary adjustments. (ii) Sustainable permanent deficits are feasible. (iii) Monetary policy leaves fiscal footprints, even with passive fiscal policy. (iv) Fewer controversies around active fiscal policy. (v) Equilibria are unique under a wider class of fiscal and monetary rules. (vi) With short-term debt, raising nominal rates without a fiscal contraction raises inflation. (vii) Unfunded fiscal stimulus is more inflationary. (viii) Even fully funded fiscal stimulus is inflationary. (ix) Fiscal transfers can substitute for monetary policy in the aggregate.

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  • Greg Kaplan, 2025. "Implications of Fiscal-Monetary Interaction from HANK Models," NBER Working Papers 34117, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:34117
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    1. Breitenlechner, Max & Geiger, Martin & Klein, Mathias, 2026. "The Fiscal Channel of Monetary Policy," Working Paper Series 469, Sveriges Riksbank (Central Bank of Sweden).

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    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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