Seminar in Macroeconomics - Florin Bilbiie (University of Lausanne)
Monetary Policy and Heterogeneity: An Analytical Framework
Tuesday 29 October 2019 (12h15 - 13h30) - Extranef - 109
THANK is a tractable heterogeneous-agent New-Keynesian model that captures analytically key
channels of quantitative-HANK models: cyclical inequality; idiosyncratic risk and self-insurance,
precautionary saving; and realistic propensities to consume. I use it for a full-fledged NK analysis in closed form of: determinacy with interest rate rules, solving the forward guidance puzzle, amplification and multipliers, and optimal monetary policy—in normal times and in liquidity traps. Amplification requires countercyclical while solving the puzzle requires procyclical inequality; this is a Catch-22, resolved by adding separate (pro)cyclical risk sources. Price-level-targeting ensures determinacy and is puzzle-free, regardless of the cyclicality of inequality and risk. Optimal policy with heterogeneity features a novel inequality-stabilization motive generating higher inflation volatility and, in a liquidity trap, shorter forward-guidance duration.