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A comparison of monetary policy rules in a HANK model

Author

Listed:
  • Dobrew, Michael
  • Gerke, Rafael
  • Giesen, Sebastian
  • Röttger, Joost

Abstract

This paper provides a comparison of monetary policy rules with make-up and/or asymmetric elements for a heterogeneous agent New Keynesian (HANK) model. The model features incomplete financial markets, nominal price and wage rigidities, rational expectations, an occasionally binding effective lower bound (ELB) on the short-term nominal interest rate as well as aggregate demand and cost-push shocks. Simulations show that symmetric policy rules with make-up elements can substantially lower the downward inflation bias induced by the ELB and reduce macroeconomic volatility. Asymmetric policy rules can address the downward inflation bias as well but lead to a substantial overshooting of the inflation target if they also feature make-up elements. The predictions of the HANK model for the considered policy rules are close to those obtained for a corresponding (representative agent) model version with complete markets.

Suggested Citation

  • Dobrew, Michael & Gerke, Rafael & Giesen, Sebastian & Röttger, Joost, 2021. "A comparison of monetary policy rules in a HANK model," Technical Papers 02/2021, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubtps:283325
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    References listed on IDEAS

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    Cited by:

    1. Dobrew, Michael & Gerke, Rafael & Giesen, Sebastian & Röttger, Joost, 2025. "Make-up strategies with incomplete markets and bounded rationality," European Economic Review, Elsevier, vol. 173(C).

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    Keywords

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    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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