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

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Dávila, Eduardo

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TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w30961.Publication details: Cambridge, Mass. National Bureau of Economic Research 2023.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: 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.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w30961 (Browse shelf(Opens below))	Not For Loan

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February 2023.

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.