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A comparison of monetary policy rules in a HANK model

Author

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  • Dobrew, Michael
  • Gerke, Rafael
  • Giesen, Sebastian
  • Röttger, Joost

Abstract

This paper provides a comparison of monetary policy rules with make-up and/or asymmetric elements for a heterogeneous agent New Keynesian (HANK) model. The model features incomplete financial markets, nominal price and wage rigidities, rational expectations, an occasionally binding effective lower bound (ELB) on the short-term nominal interest rate as well as aggregate demand and cost-push shocks. Simulations show that symmetric policy rules with make-up elements can substantially lower the downward inflation bias induced by the ELB and reduce macroeconomic volatility. Asymmetric policy rules can address the downward inflation bias as well but lead to a substantial overshooting of the inflation target if they also feature make-up elements. The predictions of the HANK model for the considered policy rules are close to those obtained for a corresponding (representative agent) model version with complete markets.

Suggested Citation

  • Dobrew, Michael & Gerke, Rafael & Giesen, Sebastian & Röttger, Joost, 2021. "A comparison of monetary policy rules in a HANK model," Technical Papers 02/2021, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubtps:283325
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    References listed on IDEAS

    as
    1. Günter Coenen & Carlos Montes‐Galdón & Frank Smets, 2023. "Effects of State‐Dependent Forward Guidance, Large‐Scale Asset Purchases, and Fiscal Stimulus in a Low‐Interest‐Rate Environment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(4), pages 825-858, June.
    2. Cecion, Martina & Coenen, Günter & Gerke, Rafael & Le Bihan, Hervé & Motto, Roberto & Aguilar, Pablo & Ajevskis, Viktors & Giesen, Sebastian & Albertazzi, Ugo & Gilbert, Niels & Al-Haschimi, Alexander, 2021. "The ECB’s price stability framework: past experience, and current and future challenges," Occasional Paper Series 269, European Central Bank.
    3. Jordi Galí, 2015. "Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework and Its Applications Second edition," Economics Books, Princeton University Press, edition 2, number 10495.
    4. Young, Eric R., 2010. "Solving the incomplete markets model with aggregate uncertainty using the Krusell-Smith algorithm and non-stochastic simulations," Journal of Economic Dynamics and Control, Elsevier, vol. 34(1), pages 36-41, January.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Monetary Policy; HANK; Household Heterogeneity; Effective Lower Bound; Make-Up Strategies; Asymmetric Policy Rules; Inequality;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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