Working Paper: NBER ID: w21897
Authors: Greg Kaplan; Benjamin Moll; Giovanni L. Violante
Abstract: We revisit the transmission mechanism of monetary policy for household consumption in a Heterogeneous Agent New Keynesian (HANK) model. The model yields empirically realistic distributions of household wealth and marginal propensities to consume because of two key features: multiple assets with different degrees of liquidity and an idiosyncratic income process with leptokurtic income changes. 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 intertemporal substitution drives virtually all of the transmission from interest rates to consumption.
Keywords: No keywords provided
JEL Codes: E0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| interest rate changes (E43) | household consumption (D10) |
| unexpected interest rate cut (E43) | increased labor demand (J23) |
| increased labor demand (J23) | household consumption (D10) |
| fiscal responses to changes in interest rates (E43) | overall consumption response (D12) |
| general equilibrium effects (D50) | household consumption (D10) |