Monetary Policy According to Hank

63 Pages Posted: 20 Jan 2016 Last revised: 3 Feb 2016

See all articles by Greg Kaplan

Greg Kaplan

Princeton University - Department of Economics

Benjamin Moll

Princeton University - Department of Economics

Giovanni L. Violante

New York University, Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2016

Abstract

We revisit the transmission mechanism of monetary policy for household consumption in a Heterogeneous Agent New Keynesian (HANK) model. The model yields empirically realistic distributions of household wealth and marginal propensities to consume because of two key features: multiple assets with different degrees of liquidity and an idiosyncratic income process with leptokurtic income changes. 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 intertemporal substitution drives virtually all of the transmission from interest rates to consumption.

Suggested Citation

Kaplan, Greg and Moll, Benjamin and Violante, Giovanni L., Monetary Policy According to Hank (January 2016). NBER Working Paper No. w21897. Available at SSRN: https://ssrn.com/abstract=2717308

Greg Kaplan (Contact Author)

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

Benjamin Moll

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

Giovanni L. Violante

New York University, Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States
212-992-9771 (Phone)
212-995-4186 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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