Fiscal and Monetary Policy with Heterogeneous Agents

In the past decade, a new paradigm for fiscal and monetary policy analysis has emerged, combining the canonical macro model of income and wealth inequality with the New Keynesian model. These Heterogeneous-Agent New Keynesian (“HANK”) models feature new transmission channels and allow for the joint study of aggregate and distributional effects. We review key developments in this literature through the lens of a unified “canonical HANK model”. Monetary and balanced-budget fiscal policy have similar aggregate effects as in the standard new Keynesian model, while deficit-financed fiscal policy is much more expansionary. We discuss the split between direct and indirect effects of policy, and also the implications of cyclical income risk, maturity structure, nominal assets, behavioral frictions, and many other extensions to the model. Throughout, we highlight the benefits of using sequence-space methods to solve and analyze this class of models.