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Discussion Paper Details

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Title: Monetary Policy and Redistribution Guided by TANK: the Magic of Output Stabilization and Capital Adjustment Costs

Author(s): Lilia Maliar and Christopher Naubert

Publication Date: November 2019

Keyword(s): forward guidance, New Keynesian Model, redistribution and TANK

Programme Area(s): Monetary Economics and Fluctuations

Abstract: We demonstrate that the standard two-agent new Keynesian (TANK) model without capital is able to simultaneously produce monetary policy amplification and reasonable responses to forward guidance if a central bank stabilizes output. For both deterministic and stochastic versions, we derive novel closed-form solutions for all conceivable cases of eigenvalues and analyze the effects of redistribution between participants and non-participants in asset markets. How redistribution resources are funded plays a key role in equilibrium determinacy, as well as in monetary-policy effects at the individual and aggregate levels. A stochastic version of the model counterfactually predicts that positive productivity shocks always worsens consumption inequality. The latter negative implication can be overcome in a version of the model with capital adjustment costs that realistically predicts countercylical consumption inequality.

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Bibliographic Reference

Maliar, L and Naubert, C. 2019. 'Monetary Policy and Redistribution Guided by TANK: the Magic of Output Stabilization and Capital Adjustment Costs'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14159