Monetary Policy According to HANK

66 Pages Posted: 12 May 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: May 11, 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.

Keywords: Monetary Policy, Heterogeneous Agents, New Keynesian, Consumption, Liquidity, Inequality, Earnings Kurtosis

JEL Classification: D14, D31, E21, E52

Suggested Citation

Kaplan, Greg and Moll, Benjamin and Violante, Giovanni L., Monetary Policy According to HANK (May 11, 2016). ECB Working Paper No. 1899. Available at SSRN: https://ssrn.com/abstract=2778504

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

Register to save articles to
your library

Register

Paper statistics

Downloads
38
Abstract Views
611
PlumX Metrics