Discussion paper

DP19060 Global Indeterminacy in HANK economies

We show that in Heterogeneous-Agent New-Keynesian (HANK) economies with countercyclical risk the natural interest rate is endogenous and co-moves with output, leaving the economy susceptible to self-fulfilling fluctuations. Unlike in Representative-Agent New-Keynesian models, the Taylor principle is not sufficient to guarantee uniqueness of equilibrium in HANK if risk is even mildly countercyclical. In fact, we prove that multiple bounded-equilibria exist, no matter how strongly monetary policy responds to changes in inflation. Neither inertial rules nor rules which respond to output-gap fluctuations can resolve this indeterminacy. Instead, to implement a unique equilibrium, policy must stabilize endogenous natural rate fluctuations.


Acharya, S and J Benhabib (2024), ‘DP19060 Global Indeterminacy in HANK economies‘, CEPR Discussion Paper No. 19060. CEPR Press, Paris & London. https://cepr.org/publications/dp19060