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Optimal Monetary Policy According to HANK

Author

Listed:
  • Sushant Acharya

    (CEPR - Center for Economic Policy Research)

  • Edouard Challe

    (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • Keshav Dogra

    (Federal Reserve Bank of New York)

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.

Suggested Citation

  • Sushant Acharya & Edouard Challe & Keshav Dogra, 2023. "Optimal Monetary Policy According to HANK," PSE-Ecole d'économie de Paris (Postprint) hal-04645687, HAL.
    • Handle: RePEc:hal:pseptp:hal-04645687
    DOI: 10.1257/aer.20200239
    Note: View the original document on HAL open archive server: https://hal.science/hal-04645687
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