Discussion Paper Details

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Title: Optimal Monetary Policy According to HANK

Author(s): Sushant Acharya, Edouard Challe and Keshav Dogra

Publication Date: February 2020

Keyword(s): incomplete markets, New Keynesian Model and Optimal monetary policy

Programme Area(s): Monetary Economics and Fluctuations

Abstract: We study optimal monetary policy in a Heterogenous-Agent New-Keynesian economy. A utilitarian planner seeks to reduce consumption inequality, in addition to stabilizing output gaps and inflation. The planner does so both by reducing income risk faced by households, and by reducing the pass-through from income to consumption risk, trading-off the benefits of lower inequality against productive inefficiency and higher inflation. When income risk is countercyclical, policy curtails the fall in output in recessions to mitigate the increase in inequality. We uncover a new form of time-inconsistency of the Ramsey-plan - the temptation to exploit households' unhedged interest-rate exposure to lower inequality.

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Bibliographic Reference

Acharya, S, Challe, E and Dogra, K. 2020. 'Optimal Monetary Policy According to HANK'. London, Centre for Economic Policy Research.