Monetary Policy According to HANK
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.
We thank Yves Achdou, Mark Aguiar, Fernando Alvarez, Adrien Auclert, Jess Benhabib, Luca Dedola, Emmanuel Farhi, Mark Gertler, Keith Kuester, David Lagakos, Emi Nakamura, Larry Schmidt, Jon Steinsson, Mirko Wiederholt and seminar participants at various institutions. Damien Capelle and Julia Fonseca provided superb research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
• My primary employer is Princeton University.
• During the last three years, the following institutions have paid me or given me research grants valued cumulatively at more than $5000:
o Reserve Bank of Australia
o Brookings Institution
o National Science Foundation
o Sloan Foundation
o University of New South Wales
Greg Kaplan & Benjamin Moll & Giovanni L. Violante, 2018. "Monetary Policy According to HANK," American Economic Review, vol 108(3), pages 697-743. citation courtesy of