Understanding HANK: Insights from a PRANK

Acharya, Sushant; Dogra, Keshav

doi:10.2139/ssrn.3127024

Cited by 20 publications

(44 citation statements)

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“…Recent papers have studied how these new elements affect the propagation of conventional (Kaplan et al (2018), Auclert (2019) ) and unconventional monetary policy. In particular, a set of papers has tried to answer the question of whether HANK models dampen or amplify, with respect to the RANK framework, the aggregate effects of forward guidance (MNS, Werning (2015), Hagedorn et al (2019), Bilbiie (2019), Acharya and Dogra (2019)). This debate has so far abstracted from the redistrubition arising from the interaction between household debt and forward guidance.…”

Section: Discussionmentioning

confidence: 99%

“…These assumptions imply that, in MNS, forward guidance redistributes resources towards wealthier agents with lower marginal propensity to consume (MPC), which limits the effect on aggregate demand. Furthermore, several authors use tractable versions of HANK models, with a degenerate wealth distribution, to show analytically that the power of forward guidance depends on the cyclicality of income risk (Werning (2015), Acharya and Dogra (2019), Bilbiie (2019)), of liquidity (Werning (2015)) and of inequality (Bilbiie (2019)). Consequently, quantitative HANK models, in which the wealth distribution is a relevant state variable, can give different answers to the question of whether forward guidance is still a powerful tool in heterogeneous agents frameworks.…”

Section: Introductionmentioning

confidence: 99%

“…The redistributive channels introduced by household debt imply that income risk decreases with future expansionary monetary policy, as the gap between the total income of savers and borrowers narrows, reducing precautionary motives and strengthening the power of forward guidance. Our framework is directly comparable with the setting in MNS and it allows for a richer quantitative analysis than the analytical setting in Bilbiie (2019) or Acharya and Dogra (2019). Hagedorn et al (2019) use a quantitative HANK model and maintain the assumption of a zero borrowing limit for households.…”

Section: Introductionmentioning

confidence: 99%

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Household Debt and the Heterogeneous Effects of Forward Guidance

Ferrante

Paustian

2019

internationalfinance

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We develop an incomplete-markets heterogeneous agent New-Keynesian (HANK) model in which households are allowed to lend and borrow, subject to a borrowing constraint. We show that, in this framework, forward guidance, that is the promise by the central bank to lower future interest rates, can be a powerful policy tool, especially when the economy is in a liquidity trap. In our model, the power of forward guidance is amplified by three redistributive channels, absent in a representative agent new-Keynesian model (RANK) or in a HANK model without private debt. First, expected lower rates imply a future transfer of wealth from savers to borrowers, reducing precautionary motives and stimulating current demand and inflation. Second, higher initial inflation lowers the path of the real rate increasing the wealth of borrowers, who have a higher marginal propensity to consume (MPC). Third, if debt is nominal, debt deflation generates also a wealth transfer towards high-MPC borrowing-constrained agents, further increasing aggregate consumption and inflation. These channels amplify each other in a liquidity trap, and can make forward guidance more powerful in a HANK model than in a RANK framework. These results contrast with previous research on HANK models, which focused on frameworks where agents were not allowed to borrow, and which found negligible effects of forward guidance.

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Section: Discussionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Household Debt and the Heterogeneous Effects of Forward Guidance

Ferrante

Paustian

2019

internationalfinance

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“…Other papers in this field also show how optimal monetary policy depends on the balance between aggregate stabilization and cross-sectional efficiency (Lorenzoni (2010)), whether information is exogenous or endogenous (Paciello and Wiederholt (2013)) and whether monetary policy signals information about the state of the economy (Baeriswyl and Cornand (2010), Tang (2013) and Jia (2019)) Recent research on forward guidance is motivated by the discrepancy between the predicted explosive dynamics for inflation and output in a workhorse New Keynesian model and its limited effect in practice in the U.S. since the Great Recession, which is referred to as the forward guidance puzzle by Del Negro, Giannoni, and Patterson (2012). Economists have shown how incomplete financial markets (McKay, Nakamura, and Steinsson (2016), Kaplan, Moll, and Violante (2018) and Acharya and Dogra (2018)), bounded rationality (Gabaix (2016) and Farhi and Werning (2017)), or imperfect information about either the state of the economy or monetary policy (Angeletos and Lian (2018), Andrade et al (2019), and Campbell et al (2019)) can reconcile the model predictions and the empirical evidence. Bassetto (2019) and Bilbiie (2019) study the question of the optimal form of forward guidance.…”

Section: Related Literaturementioning

confidence: 99%

Forward Guidance under Imperfect Information: Instrument Based or State Contingent?

Jia

2019

Working Paper (Federal Reserve Bank of Cleveland)

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Forward Guidance under Imperfect Information: Instrument Based or State Contingent? Chengcheng Jia I study the optimal type of forward guidance in a flexible-price economy in which both the private sector and the central bank are subject to imperfect information about the aggregate state of the economy. In this case, forward guidance changes the private sector's expectations about both future monetary policy and the state of the economy. I study two types of forward guidance. The first type is instrument based, in which case the central bank commits to a value of the policy instrument. The second type is state contingent, in which case the central bank reveals its imperfect information and commits to a policy response rule. The key message is that forward guidance allows the central bank to reduce ex-ante price fluctuations by making the optimal trade-off between price deviations after the actual shock and after the noise shock. However, this benefit comes with a cost under the instrument-based forward guidance; that is, since firms perfectly know the change in monetary policy and prices are fully flexible, the real output level becomes independent of monetary policy. Consequently, while state-contingent forward guidance guarantees ex-ante welfare improvement, instrument-based forward guidance improves ex-ante welfare only if the central bank's information is sufficiently precise.

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“…Moreover, in HANK, an assumption is needed about the extent to which fluctuations in labor demand are concentrated among different households, whereas in RANK no such assumption is necessary. Finally, because of the precautionary saving motive and occasionally binding borrowing constraint, in HANK the cyclicality of idiosyncratic uncertainty and access to liquidity are important determinants of the effects of aggregate shocks to household consumption (Acharya and Dogra, 2018;Werning, 2015).…”

Section: Heterogeneity Requires Making Additional Assumptionsmentioning

confidence: 99%

Microeconomic Heterogeneity and Macroeconomic Shocks

Kaplan

Violante

2018

SSRN Journal

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I n this essay, we discuss the emerging literature in macroeconomics that combines heterogeneous agent models, nominal rigidities, and aggregate shocks. This literature opens the door to the analysis of distributional issues, economic fluctuations, and stabilization policies-all within the same framework. Quantitative macroeconomic models have integrated heterogeneous agents and incomplete markets for nearly three decades, but they have been mainly used for the investigation of consumption and saving behavior, inequality, redistributive policies, economic mobility, and other cross-sectional phenomena. Representative agent models have remained the benchmark in the study of aggregate fluctuations (for reasons we will discuss later). However, the Great Recession bluntly exposed the shortcomings of a representative-agent approach to business cycle analysis. A broadly shared interpretation of the Great Recession places its origins in housing and credit markets. The collapse in house prices affected households differently, depending on the composition of their balance sheets. The extent to which this

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Understanding HANK: Insights from a PRANK

Cited by 20 publications

References 24 publications

Household Debt and the Heterogeneous Effects of Forward Guidance

Household Debt and the Heterogeneous Effects of Forward Guidance

Forward Guidance under Imperfect Information: Instrument Based or State Contingent?

Microeconomic Heterogeneity and Macroeconomic Shocks

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