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) co
unterparts along two dimensions: differences in average consumption at any
point in time between constrained and unconstrained households, and consump
tion heterogeneity within the subset of unconstrained households. These two
factors are captured in a simple way by two “wedges” that appear in an agg
regate Euler equation, and whose behavior can be traced in response to any
aggregate shock, allowing us to assess their quantitative significance. A s
imple two-agent New Keynesian (TANK) model abstracts completely from hetero
geneity within unconstrained agents, but is shown to capture reasonably wel
l the implications of a baseline HANK model regarding the effects of aggreg
ate shocks on aggregate variables. We discuss the implications of our findi
ngs for the design of optimal monetary policy.