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Optimal Monetary Policy According to HANK

  • Sushant Acharya
  • Edouard Challe
  • Keshav Dogra
American Economic Review
vol. 113, no. 7, July 2023
(pp. 1741-82)
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Abstract

We study optimal monetary policy in an analytically tractable heterogeneous agent New Keynesian model with rich cross-sectional heterogeneity. Optimal policy differs from a representative agent benchmark because monetary policy can affect consumption inequality, by stabilizing consumption risk arising from both idiosyncratic shocks and unequal exposures to aggregate shocks. The trade-off between consumption inequality, productive efficiency, and price stability is summarized in a simple linear-quadratic problem yielding interpretable target criteria. Stabilizing consumption inequality requires putting some weight on stabilizing the level of output, and correspondingly reducing the weights on the output gap and price level relative to the representative agent benchmark.

Citation

Acharya, Sushant, Edouard Challe, and Keshav Dogra. 2023. "Optimal Monetary Policy According to HANK." American Economic Review, 113 (7): 1741-82. DOI: 10.1257/aer.20200239

Additional Materials

JEL Classification

  • E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
  • E23 Macroeconomics: Production
  • E31 Price Level; Inflation; Deflation
  • E32 Business Fluctuations; Cycles
  • E52 Monetary Policy
  • E62 Fiscal Policy