DP14694 Corona Policy According to HANK

Author(s): Marcus Hagedorn, Kurt Mitman
Publication Date: May 2020
Keyword(s): Art.123(1) TFEU, Fiscal/monetary policy interaction, HANK, inflation, monetary financing
JEL(s): D52, E31, E52, E62, E63
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14694

In this note, we analyze the role of the European Central Bank through the lens of the Heterogenous-agent New Keynesian Model (HANK), a new paradigm of fiscal and monetary policy that abandons the assumption of perfectly functioning financial markets. We emphasize three principles that emerge from this view: 1) the effect of fiscal and monetary financing on inflation; 2) the close interaction between fiscal and monetary policy in the determination of inflation; and 3) an economic perspective on Art.123(1) TFEU, the "prohibition of monetary financing."