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New Keynesian Economics with Household and Firm Heterogeneity

Author

Listed:
  • Thomas Winberry
  • Adrien Auclert
  • Matthew Rognlie
  • Ludwig Straub

Abstract

Over the past decade, the Heterogeneous-Agent New Keynesian (HANK) literature has shown that household heterogeneity matters for the transmission of monetary and fiscal policy. Drawing on lessons from this literature, we provide a framework for incorporating firm heterogeneity into HANK. Household models use precautionary savings and borrowing constraints to rationalize the high average marginal propensities to consume (MPCs) estimated in empirical work, and these high MPCs activate new transmission channels through after-tax-and-transfer income. Likewise, we develop a benchmark heterogeneous-firm model in which financial frictions can generate high average marginal propensities to invest (MPIs), activating analogous channels through after-tax-and-transfer cash flows. However, unlike for MPCs, we do not have a consensus set of credible estimates of the MPI distribution for a broad sample of firms. We therefore survey the choices that shape the MPI distribution, and so the strength of new policy transmission channels, within models.

Suggested Citation

  • Thomas Winberry & Adrien Auclert & Matthew Rognlie & Ludwig Straub, 2025. "New Keynesian Economics with Household and Firm Heterogeneity," NBER Working Papers 34611, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:34611
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    Cited by:

    1. Christophe Cahn & Patrick Fève & Julien Matheron, 2026. "DSGE Models in Central Banks: Progress and Prospects," Working papers 1066, Banque de France.

    More about this item

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • D2 - Microeconomics - - Production and Organizations
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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