Optimal Monetary Policy According to HANK

This paper studies optimal monetary policy in an analytically tractable heterogeneous-agent New Keynesian (HANK) economy in which households face uninsurable idiosyncratic labor-disutility shocks and can only self-insure through a riskless bond and hours worked. Using CARA preferences and normally distributed shocks – a device the authors also used in earlier work – the model aggregates linearly, so that the entire cross-sectional distribution of consumption collapses to a single sufficient statistic (Sigma_t) that a utilitarian Ramsey planner weighs alongside the standard output-gap and inflation objectives. The paper shows that monetary policy affects this inequality statistic through up to four distinct channels – income risk, self-insurance, unhedged interest rate exposure (URE), and (with nominal debt) the Fisher channel – and derives closed-form optimal policy rules that nest the representative-agent (RANK) case. When income risk is countercyclical (the empirically relevant case), optimal policy curtails the fall in output during recessions more than RANK would, tolerating higher inflation because doing so also limits the associated rise in consumption inequality. The paper’s most novel result is normative and methodological rather than purely quantitative: because a surprise rate cut can redistribute from savers to debtors given existing wealth dispersion, but an anticipated one cannot, the Ramsey-optimal plan is time-inconsistent in a genuinely new way – a benevolent planner who could re-optimize would always want to engineer one more surprise cut. These results are derived under the baseline assumption of real (inflation-indexed) household debt; Section 6 shows they survive, and are reinforced, when debt is nominal and the Fisher channel is reintroduced.

Edouard Challe | Macro Paper Warehouse

Optimal Monetary Policy According to HANK