Optimal Monetary Policy with Heterogeneous Agents: Discretion, Commitment, and Timeless Policy / Eduardo Dávila, Andreas Schaab.

Format:

Book

Author/Creator:

Dávila, Eduardo.

Contributor:

National Bureau of Economic Research.

Schaab, Andreas.

Series:

Working Paper Series (National Bureau of Economic Research) no. w30961.

NBER working paper series no. w30961

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2023.

Summary:

This paper characterizes optimal monetary policy in a canonical heterogeneous-agent New Keynesian (HANK) model with wage rigidity. Under discretion, a utilitarian planner faces the incentive to redistribute towards indebted, high marginal utility households, which is a new source of inflationary bias. With commitment, i) zero inflation is the optimal long-run policy, ii) time-consistent policy requires both inflation and distributional penalties, and iii) the planner trades off aggregate stabilization against distributional considerations, so Divine Coincidence fails. We compute optimal stabilization policy in response to productivity, demand, and cost-push shocks using sequence-space methods, which we extend to Ramsey problems and welfare analysis.

Notes:

Print version record

February 2023.