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HANK beyond FIRE: Amplification, forward guidance, and belief shocks

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  • José-Elías Gallegos

    (Banco de España)

Abstract

The transmission channel of monetary policy in the benchmark New Keynesian (NK) framework relies on the counterfactual Full Information Rational Expectations (FIRE) assumption, particularly at the general equilibrium (GE) dimension. I relax the Full Information assumption and build a Heterogeneous-Agents NK model under financial frictions and dispersed information. I find that the amplification multiplier of monetary policy is dampened by the lessened role of GE effects. I then conduct the standard full-fledged NK analysis: the determinacy region is widened as a result of as if aggregate myopia, and the framework beyond FIRE does not suffer from the forward guidance puzzle. Finally, I find that transitory “animal spirits” shocks generate persistent effects.

Suggested Citation

  • José-Elías Gallegos, 2024. "HANK beyond FIRE: Amplification, forward guidance, and belief shocks," Working Papers 2418, Banco de España.
    • Handle: RePEc:bde:wpaper:2418
    DOI: https://doi.org/10.53479/36653
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    References listed on IDEAS

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    More about this item

    Keywords

    imperfect information; New Keynesian; heterogeneous agents; monetary policy;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy

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