Optimal Policy with Heterogeneous Agents
Saturday, Jan. 7, 2023 10:15 AM - 12:15 PM (CST)
- Chair: Matthew Rognlie, Northwestern University
Firm Heterogeneity, Capital Misallocation and Optimal Monetary Policy
AbstractWe analyze monetary policy in a New Keynesian model with heterogeneous firms and financial frictions. Firms differ in their productivity and net worth and face collateral constraints that cause capital misallocation. TFP endogenously depends on the time-varying distribution of firms. A monetary expansion increases the investment of constrained firms with a high marginal revenue product of capital (MRPK) relatively more than that of low-MRPK ones, crowding out the latter and increasing TFP. We provide empirical evidence based on Spanish granular data supporting this mechanism. This has important implications for optimal monetary policy design. First, a central bank without pre-commitments engineers an unexpected monetary expansion to increase TFP in the medium run. Second, the divine coincidence holds after a demand shock. Third, if nominal rates are constrained by the zero lower bound, the optimal policy prescribes that rates should remain low for much longer than under complete markets.
Optimal Monetary Policy According to HANK
AbstractWe 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 tradeoff 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.
Optimal Monetary Policy with Heterogeneous Agents: A Timeless Ramsey Approach
AbstractThis paper characterizes optimal monetary policy in a canonical heterogeneous-agent New Keynesian (“HANK”) model with wage rigidity. We develop a timeless Ramsey approach to study optimal long-run policy, time inconsistency, and optimal stabilization policy, as well as optimal policy under discretion. We show that i) zero inflation is the optimal long-run policy in our baseline model, ii) the standard inflation target is augmented by distributional considerations, iii) monetary policy in HANK faces a second source of time inconsistency that requires a new distributional target, iv) Divine Coincidence fails in heterogeneous-agent economies due to pecuniary externalities even in the absence of cost-push shocks, and v) there are gains from commitment relative to discretion even in the absence of cost-push shocks. We compute optimal stabilization policy in response to productivity, demand, and cost-push shocks both non-linearly and using sequence-space perturbation methods, which we extend to Ramsey problems and welfare analysis.
- E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit
- E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook