Optimal Monetary Policy According to Hank

77 Pages Posted: 3 Mar 2020 Last revised: 22 Sep 2021

See all articles by Sushant Acharya

Sushant Acharya

Federal Reserve Banks - Federal Reserve Bank of New York

Edouard Challe

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST)

Keshav Dogra

Federal Reserve Banks - Federal Reserve Bank of New York

Date Written: February 2020

Abstract

We study optimal monetary policy in an analytically tractable Heterogeneous Agent New Keynesian model with rich cross-sectional heterogeneity. Optimal policy differs from that in a representative agent model because monetary policy can affect consumption inequality, both by reducing idiosyncratic consumption risk and by reducing inequality arising from households' unequal exposures to aggregate shocks. Simple target criteria summarize the planner's tradeoff between consumption inequality, productive efficiency and price stability. Mitigating consumption inequality requires putting some weight on stabilizing the level of output, and correspondingly reducing the weights on the output gap and the price level relative to an economy without inequality.

Keywords: incomplete markets, New Keynesian Model, Optimal monetary policy

JEL Classification: E21, E30, E52, E62, E63

Suggested Citation

Acharya, Sushant and Challe, Edouard and Dogra, Keshav, Optimal Monetary Policy According to Hank (February 2020). CEPR Discussion Paper No. DP14429, Available at SSRN: https://ssrn.com/abstract=3547362

Sushant Acharya (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Edouard Challe

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST) ( email )

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France

Keshav Dogra

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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