From RANK to HANK, without FIRE

We offer guidance and tools for augmenting macroeconomic models with a realistic friction in expectations and for quantifying its implications. We start by distilling the common essence of a few popular alternatives to FIRE (Full Information Rational Expectations), including noisy or sticky information, rational or behavioral inattention, level-k thinking and cognitive discounting. We then develop a new specification, which captures the same essence while maximizing tractability. We show how this works in both RANK (the Representative-Agent New Keynesian model) and HANK (Heterogeneous-Agent New Keynesian models). We further clarify the separate partial- and general-equilibrium effects of informational frictions or bounded rationality; emphasize the interaction of such frictions with the Intertemporal Keynesian Cross and other forms of strategic complementarity; review concrete lessons for business cycles and macroeconomic policy; and discuss how to discipline the theory with appropriate survey evidence.