Monetary Policy with Heterogeneous Agents: Insights from TANK Models (with J.ordi Galí)

Abstract:
Heterogeneous agents New Keynesian (HANK) models are shown to differ from their representative agent (RANK) counterparts along two dimensions: differences in average consumption at any point in time between constrained and unconstrained households, and consumption heterogeneity within the subset of unconstrained households. These two factors are captured in a simple way by two “wedges” that appear in an aggregate Euler equation, and whose behavior can be traced in response to any aggregate shock, allowing us to assess their quantitative significance. A simple two-agent New Keynesian (TANK) model abstracts completely from heterogeneity within unconstrained agents, but is shown to capture reasonably well the implications of a baseline HANK model regarding the effects of aggregate shocks on aggregate variables. We discuss the implications of our findings for the design of optimal monetary policy.