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American Economic Review Vol. 108 No. 3 2018

Monetary Policy According to HANK

Greg Kaplan1; Benjamin Moll2; Giovanni L. Violante3

1 Department of Economics, University of Chicago, Saieh Hall, 5757 S. University Avenue, Chicago, IL 60637, and NBER (email: ) · 2 Department of Economics, Princeton University, Julis Romo Rabinowitz Building, Princeton, NJ 08542, and NBER (email: ) · 3 Department of Economics, Princeton University, Julis Romo Rabinowitz Building, Princeton, NJ 08542, CEPR, and NBER (email: )

Abstract

We revisit the transmission mechanism from monetary policy to household consumption in a Heterogeneous Agent New Keynesian (HANK) model. The model yields empirically realistic distributions of wealth and marginal propensities to consume because of two features: uninsurable income shocks and multiple assets with different degrees of liquidity and different returns. In this environment, the indirect effects of an unexpected cut in interest rates, which operate through a general equilibrium increase in labor demand, far outweigh direct effects such as intertemporal substitution. This finding is in stark contrast to small- and medium-scale Representative Agent New Keynesian (RANK) economies, where the substitution channel drives virtually all of the transmission from interest rates to consumption. Failure of Ricardian equivalence implies that, in HANK models, the fiscal reaction to the monetary expansion is a key determinant of the overall size of the macroeconomic response.

DOI
10.1257/aer.20160042
Volume
108
Issue
3
Pages
697-743
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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