2018/02/28 by Greg Kaplan, Benjamin Moll, Giovanni L. Violante · 3 citations
Economics, Econometrics and Finance · #Economic theories and models #Monetary Policy and Economic Impact #Economic Theory and Policy
paper · doi:10.1257/aer.20160042
openalex publication_date 2018/02/28 · openalex created_date 2025/10/10 · openalex updated_date 2026/08/04
We revisit the transmission mechanism from monetary policy to household consumption in a Heterogeneous Agent New Keynesian (HANK) model. The model yields empirically realistic distributions of wealth and marginal propensities to consume because of two features: uninsurable income shocks and multiple assets with different degrees of liquidity and different returns. In this environment, the indirect effects of an unexpected cut in interest rates, which operate through a general equilibrium increase in labor demand, far outweigh direct effects such as intertemporal substitution. This finding is in stark contrast to small- and medium-scale Representative Agent New Keynesian (RANK) economies, where the substitution channel drives virtually all of the transmission from interest rates to consumption. Failure of Ricardian equivalence implies that, in HANK models, the fiscal reaction to the monetary expansion is a key determinant of the overall size of the macroeconomic response. (JEL D31, E12, E21, E24, E43, E52, E62)