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Heterogeneity and Aggregate Fluctuations: Insights from TANK Models

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  • Davide Debortoli
  • Jordi Galí

Abstract

We analyze the merits and limitations of simple tractable New Keynesian models (RANK and TANK) in accounting for the aggregate predictions of Heterogenous Agent New Keynesian models (HANK). By means of comparison of a number of nested HANK models, we investigate the role played by (i) idiosyncratic income risk, (ii) a binding borrowing constraint, and (iii) a portfolio choice between liquid and illiquid assets. We argue that the effects of household heterogeneity can be largely understood looking at the differential behavior of two types of households: hand-to-mouth and unconstrained. We find that a suitably specified and calibrated TANK model (which abstracts from idiosyncratic income risk) can capture reasonably well the aggregate implications of household heterogeneity and the main channels through which it operates. That ability increases in the presence of a policy rule that emphasizes inflation stability. In the limiting case of a strict inflation targeting policy, heterogeneity becomes irrelevant for the determination of aggregate output.

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  • Davide Debortoli & Jordi Galí, 2024. "Heterogeneity and Aggregate Fluctuations: Insights from TANK Models," NBER Working Papers 32557, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:32557
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    1. Bilbiie, Florin & Monacelli, Tommas & Perotti, Roberto, 2020. "Stabilization vs. Redistribution: the Optimal Monetary-Fiscal Mix," CEPR Discussion Papers 15199, C.E.P.R. Discussion Papers.

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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