Inequality and Shocks to Firms' Pricing Decisions

Abstract

We analyze how inflationary shocks, specifically unexpected increases in the inflation target of firms’ price indexation rule, influence aggregate outcomes through the inequality among agents in an economy, represented by a New Keynesian model with heterogeneous agents (HANK model). We compare the aggregate dynamics of this model with those of a representative agent New Keynesian (RANK) model. We find that such shocks have significant real effects in both models, but in the HANK model, agents respond by increasing their labor and savings, leading to higher capital accumulation and equity values. 

Keywords: HANK, inequality, incomplete markets, price-setting indexation, General Aggregative Models: Keynes, Keynesian, Post-Keynesian Macroeconomics: Consumption, Saving, Wealth, Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital, Aggregate Labor Productivity, Monetary Policy, Interest Rates: Determination, Term Structure, Effects

JEL Classification: E12, E21, E24, E43, E52